Wages, housing costs stoking price pressures in services sector

Persistent inflation in the services sector is posing a key impediment to interest rate cuts, says Fitch Ratings.

In a new report, the rating agency noted that, while global inflation is generally receding, the easing of price pressures is being slowed by the services sector.

Declines in food and energy prices have curbed headline inflation, Fitch said.

And core goods inflation has dropped in many countries too, it noted.

“But there are few signs of core goods prices declining outright,” it said. “This means services inflation will need to fall further for inflation to return sustainably to target.”

Fitch said it expects services inflation to remain “sticky” in the months ahead.

“Services industries are more labour-intensive than the goods sector, and tight labour markets and high wage inflation are having a bigger impact,” it said. Wage growth in the services sector is still well above pre-pandemic rates in the U.S. and Europe, it said.

Additionally, housing costs are contributing to high services inflation, Fitch noted.

“Strong house price growth in the pandemic has contributed — often with a considerable delay — to high housing rental inflation, an important component of the services basket,” it said.

Moreover, the decline in goods inflation has only a small impact on services prices, since material input costs represent only a small share of total costs in services, it said.