Core Services Inflation Ex-Shelter Stuck at 4.6% as 5.19% Treasury Yield Reprices the Cost of Sticky Prices

The Sticky Services Puzzle: Why 4.6% Is the New 3%

Core services inflation excluding shelter—everything from haircuts to hospital visits—is running at 4.6% year-over-year, more than double the pre-pandemic average. This isn't a supply-chain hangover; it's a wage-driven structural shift. Unit labor costs in services are up 4.8% annually, and with productivity growth stuck at 1.2%, businesses have no choice but to pass costs along. The Fed's 4.75% policy rate was supposed to cool this, but services demand remains resilient, buoyed by a 4.4% personal savings rate and a tight labor market.

Why Inflation Feels Worse Than the Headline: The Real Wage Squeeze

Headline CPI may have cooled from its 2022 peaks, but for the average household, inflation feels worse because wages aren't keeping up. Real average hourly earnings have been negative for six consecutive months, and the personal savings rate has fallen to 4.4% from 5.3% a year ago. Meanwhile, credit card delinquencies have risen to 3.18%, signaling that consumers are increasingly leaning on debt to maintain spending. This is the inflation that matters: the kind that erodes purchasing power and forces families to make tough choices.

The 5.19% Yield Backdrop: How High Rates Are Both Cause and Cure

With the 10-year Treasury yielding 5.19% and the 3-month T-bill at 4.25%, the cost of capital is at its highest in decades. For businesses, this means higher borrowing costs for expansion, which should eventually cool demand and inflation. But it also raises the cost of financing inventories and working capital, pushing firms to maintain pricing power. The Fed is walking a tightrope: rates high enough to fight inflation, but not so high as to trigger a recession. For now, the bond market is pricing in a higher-for-longer regime, with the 30-year fixed mortgage at 6.72% and corporate credit spreads widening.

Positioning & Liquidity Map: Who Is Trapped?

The biggest losers in this environment are holders of long-duration bonds and rate-sensitive equities. The iShares 20+ Year Treasury Bond ETF (TLT) is down 12% year-to-date, and growth stocks trading at 23x forward earnings are vulnerable to further multiple compression. Meanwhile, cash is king: money market funds are yielding 4.25%, and retail investors are finally waking up to the opportunity cost of holding cash in low-yield savings accounts (0.45%). The marginal buyer of risk assets is now the corporate buyback desk, but with borrowing costs at 5.19%, buybacks are shrinking. The path of least resistance is lower for equities until inflation shows a sustained break below 4%.

Forward Scenarios & Probability Matrix