Inflation Cools, but Core Services Prices Remain a Risk

The easy part of the disinflation is behind us

For most of 2026, inflation has been a story about barrels. Conflict in West Asia pushed crude sharply higher in the spring, US headline inflation hit a four-year high of 4.2 per cent in May, and finance teams everywhere rebuilt their cost assumptions around fuel. Then the shooting paused, pump prices slid, and the data started behaving again.

July’s numbers show how much of that relief has actually landed. US consumer prices rose 0.1 per cent over the month and 3.4 per cent over the year, down from 3.5 per cent in June, with the energy index falling 1.5 per cent after a 5.7 per cent drop the month before. Core inflation — everything except food and energy — eased to 2.5 per cent.

That is real good news. It is also the easy part.

Strip the index down and you find two economies pulling in opposite directions. Goods have essentially stopped inflating: US core goods rose just 0.8 per cent over the year. Services never got the memo. Services excluding energy services climbed 3.0 per cent, and they carry roughly 60 per cent of the index. Take out food, shelter and energy and what is left rose only 1.9 per cent — a tidy illustration of where the pressure actually sits.

The bills nobody negotiates

The detail is where it gets uncomfortable. Shelter rose 3.2 per cent over the year and accounted for about two-thirds of July’s monthly increase on its own. Hospital services were up 5.2 per cent, dental services 5.1 per cent, home health care 9.7 per cent. Vehicle maintenance and repair: 6.6 per cent. Haircuts and other personal care: 4.4 per cent. Gardening and lawncare: 12.3 per cent. Airline fares, admittedly the most temperamental line in the whole index, were up 25.5 per cent. The one large services category genuinely falling was motor vehicle insurance, down 4.5 per cent after two punishing years.

None of this responds to a tanker changing course. These prices are set by wages, rent renewals, insurance underwriting cycles and administered fee schedules — things that move once a year, usually upward, and always late. Economists call the resulting drag the last mile. Households call it the reason the grocery bill finally looks better while the monthly outgo somehow does not.

India: the same tune, a different verse

India’s headline is currently travelling the other way. Retail inflation rose to 4.45 per cent in July from 4.38 per cent in June, the highest reading since December 2024, with food inflation at 5.52 per cent. Ginger was up 83.6 per cent, garlic 35.4 per cent and onions 22.5 per cent — a monsoon story far more than a monetary one.

The Monetary Policy Committee looked through it. At its 62nd meeting, concluding on 5 August, the RBI left the repo rate at 5.25 per cent for a fourth consecutive review, retained a neutral stance, trimmed its FY27 inflation projection to 5.0 per cent and nudged its growth forecast up to 6.7 per cent. Governor Sanjay Malhotra described the committee as neither dovish nor hawkish, said there was little sign of price pressures generalising, and pointed to a peak in the October–December quarter.

The composition supports him — up to a point. India publishes no official core measure, but India Ratings put July core at 3.9 per cent, and a meaningful slice of that is metal rather than labour: the personal care, social protection and miscellaneous division ran at 14.77 per cent, almost entirely because “other personal effects”, largely jewellery, rose 43.5 per cent. The RBI’s preferred cut — core excluding precious metals — was closer to 2.5 per cent in June.

Look at the genuine services lines and only one of them is loud. Restaurants and accommodation services rose 7.72 per cent, with food and beverage serving services at 7.75 per cent. The rest are quiet: housing 2.22 per cent, health 1.34 per cent, education services 3.64 per cent, and information and communication services a barely-there 0.30 per cent.

So India’s core services problem is mostly prospective rather than present. The worry is second-round effects — the moment at which higher fuel and food costs stop being a supply shock and start being an input into next year’s rent, salary and fee decisions. There is already a hint of it in the survey data. The HSBC India Services PMI fell to 53.3 in July from 57.4, with new business growth the weakest since February 2022 and input cost inflation at a six-month low. And yet service providers raised selling prices at the fastest pace since April, led by real estate and business services. Firms with pricing power tend to use it, even when the order book is thinning.

The currency is not helping either. With the rupee trading around 95 to the dollar, imported inputs cost more in rupee terms — fuel, edible oil, electronics, the components that quietly sit inside a services company’s price list. Imported costs land in goods first and in services second, and that lag is precisely why the back half of the fiscal year, rather than the current print, is the part worth worrying about.

“Goods prices fall when a ship docks. Services prices fall only when somebody decides to pay a person less — and nobody decides that quickly.”

Europe removes any remaining doubt

If you want the cleanest version of the argument, look at the euro area. Annual inflation was 2.9 per cent in July, up from 2.8 per cent in June. Energy ran at 10.0 per cent and core at 2.5 per cent. Services rose 3.3 per cent — and on their own contributed 1.55 percentage points of that 2.9. More than half the bloc’s inflation, in other words, is coming from haircuts, holidays, hospitals, insurance and rent.

Why this is a policy problem, not a footnote

Central banks can look through an oil shock. They find it much harder to look through services, because services inflation is the closest thing they have to a live reading of domestic demand and wage-setting.

The Federal Reserve is already caught. It held the funds rate at 3.50–3.75 per cent on 29 July for a fifth straight meeting, but the vote was 9–3, with Beth Hammack, Neel Kashkari and Lorie Logan all preferring a quarter-point hike. Chair Kevin Warsh has said the central bank has no tolerance for persistently elevated inflation, and has deliberately stopped offering forward guidance about what comes next. The following decision lands on 15–16 September.

In India, the conversation has shifted in the same direction faster than most would have guessed a year ago. HDFC Bank’s Sakshi Gupta expects inflation above 5 per cent from September, which keeps a hike alive before the year is out. Oxford Economics’ Alexandra Hermann Prasad expects a hold in October and a 25 basis point increase in December, arguing that mounting evidence of second-round effects and rising medium-term expectations will make the supply shock progressively harder to ignore. The MPC next meets from 5 to 7 October.

There is an asymmetry here worth naming out loud. A central bank can look through one supply shock without spending much credibility. Looking through a second one, while services inflation sits comfortably above target and expectations begin to drift, is how a temporary problem quietly turns into a structural one. That is the case the three Fed dissenters are making. It is also, in gentler language, the case now appearing in the RBI’s own list of things to watch.

What it means if you are running something

Your cost base is no longer an energy story. Fuel handed a lot of businesses a windfall in June and July. Rent, insurance, professional fees, maintenance contracts and salaries did not — and those are the lines that compound. Budget for services escalation in the 4 to 7 per cent range even when headline CPI prints with a 3 in front of it.

Real wages are the political variable. In the US, real average hourly earnings fell 0.2 per cent in the year to July, payrolls dropped by 23,000 and unemployment sat at 4.1 per cent. A labour market that is cooling without cracking is precisely the environment in which services inflation grinds down slowly instead of collapsing.

Pricing power is being tested right now. The PMI evidence from India says firms are still passing costs into charges. Whether they can keep doing that into a slower order book is the single best real-time indicator of whether core services inflation sticks.

What to watch next

Four things. Rent and owners’ equivalent rent momentum in the US, where the deceleration has stalled at around 3 per cent. India’s monsoon, and the pass-through of transport costs into food-service prices. Euro area wage settlements heading into the autumn bargaining round. And inflation expectations surveys everywhere, since expectations are the mechanism through which a supply shock quietly becomes a services problem.

Headline inflation is a weather report. Core services is the climate. The first has improved; the second has not — and it is the second that decides whether the last mile of disinflation takes two quarters or two years.

Sources

MoSPI / NSO — Press Release, Consumer Price Index for July 2026 (Base 2024=100) — https://www.mospi.gov.in/uploads/latestReleases/latest_release_1786529680747_3113661d-1a2b-4b9a-af06-b340193ef9a0_Press_Release_CPI_July_2026.pdf

US Bureau of Labor Statistics — Consumer Price Index, July 2026 — https://www.bls.gov/news.release/pdf/cpi.pdf

US Bureau of Labor Statistics — Real Earnings, July 2026 — https://www.bls.gov/news.release/archives/realer_08122026.htm

US Bureau of Labor Statistics — The Employment Situation, July 2026 — https://www.bls.gov/news.release/pdf/empsit.pdf

Eurostat — Annual inflation up to 2.9% in the euro area (19 August 2026) — https://ec.europa.eu/eurostat/web/products-euro-indicators/w/2-19082026-ap

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CNBC — Divided Fed holds interest rates steady, July 2026 — https://www.cnbc.com/2026/07/29/fed-rate-decision-july-2026.html

Fox Business — July FOMC: Fed holds interest rates steady — https://www.foxbusiness.com/economy/federal-reserve-interest-rate-decision-july-29-2026

CNBC — CPI inflation report, July 2026 — https://www.cnbc.com/2026/08/12/cpi-inflation-report-july-2026.html

Forbes India — RBI MPC August 2026: repo rate unchanged at 5.25%, neutral stance retained — https://www.forbesindia.com/article/news/rbi-mpc-live-updates-august-2026-repo-rate-sanjay-malhotra-policy-announcement-liveblog/2996705/1

HDFC Mutual Fund — Monetary Policy Review, August 2026 (summary of the RBI Bi-monthly Statement, 5 August 2026) — https://www.hdfcfund.com/learn/macros-markets-more/monetary-policy/monetary-policy-review-august-2026

Reuters (via Investing.com) — India’s inflation accelerates to 4.45%, but unlikely to shift RBI rate outlook — https://www.investing.com/news/economy-news/india-july-inflation-accelerates-to-445-unlikely-to-alter-rbi-rate-outlook-4854327

Business Standard — Services PMI falls to 53.3 in July, slowest growth in nearly 4.5 years — https://www.business-standard.com/economy/news/services-pmi-falls-to-53-3-in-july-slowest-growth-in-nearly-4-5-years-126080500317_1.html

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TD Economics — U.S. Consumer Price Index (July 2026) — https://economics.td.com/us-cpi