The Diverging Inflation Trends in Goods and Services: Implications for 2026 Investment Portfolios

The U.S. inflation landscape in 2025 has revealed a striking divergence between goods and services price pressures. Core goods inflation surged to a seven-month high of 0.3% month-over-month (m/m) in August 2025, driven by rebounds in apparel prices and a sharp rise in new vehicle costs, according to EY's CPI report. Meanwhile, core services inflation, though elevated at 3.6% year-over-year (y/y) for shelter, showed signs of moderation compared to earlier peaks as EY's report also indicates. This asymmetry in inflation dynamics has profound implications for 2026 investment portfolios, necessitating a recalibration of sector rotation strategies and risk management frameworks.

Sector Rotation: Aligning with Divergent Inflationary Pressures

Historical patterns suggest that goods inflation, particularly in energy and commodities, tends to favor sectors with pricing power and inelastic demand. For 2026, experts recommend overweighting energy, materials, and consumer staples, which historically outperform during goods-driven inflationary cycles, according to Easy Street Investing. For instance, J.P. Morgan forecasts that energy prices will remain volatile due to geopolitical tensions and supply constraints, making energy stocks a potential hedge against goods inflation, as noted in a recent market minute by Financial Content (see J.P. Morgan commentary). Similarly, the rebound in vehicle prices underscores the resilience of the automotive sector, which could benefit from tighter supply chains and pent-up demand, per the EY analysis.

Conversely, services inflation-driven by labor-intensive sectors like housing and travel-poses challenges for consumer discretionary and technology stocks. Goldman Sachs notes that sectors reliant on discretionary spending, such as retail and leisure, may face headwinds as households adjust budgets to higher services costs, a point highlighted in the Financial Content market minute. However, services inflation also creates opportunities in healthcare and utilities, which maintain stable demand regardless of macroeconomic shifts, a view echoed by Easy Street Investing. For example, rising healthcare costs, a persistent component of services inflation, could drive growth in medical technology and pharmaceuticals, according to EY's data.

Risk Management: Navigating a Mixed Inflation Environment

Divergent inflation trends complicate risk management, as traditional models often assume uniform price pressures. Financial institutions like Deloitte emphasize the need for real-time inflation monitoring using metrics like the CPI and PCE index to adjust credit risk assessments, as outlined in a GARP risk guide. For instance, rising goods inflation may strain manufacturing margins, while services inflation could pressure service-sector wages, altering consumer repayment capacity-a dynamic the GARP guide discusses in detail.

To mitigate these risks, investors should diversify portfolios with inflation-protected assets. Treasury Inflation-Protected Securities (TIPS) and real assets like real estate and commodities offer hedges against both goods and services inflation, as the GARP guide recommends. Additionally, tactical allocations to ETFs-such as the Energy Select Sector SPDR (XLE) or the Health Care Select Sector SPDR (XLV)-can provide diversified exposure to inflation-resistant sectors without the need for individual stock selection, a strategy highlighted earlier by Easy Street Investing.

Historical disinflation episodes, such as the 1980s and post-Covid-2020 periods, highlight the stickiness of services inflation. The Bank for International Settlements notes, in a BIS study, that services price adjustments are slower and more protracted than goods price declines, suggesting that central banks may maintain tighter monetary policy for longer. This environment favors sectors with strong cash flows, such as industrials and financials, which can withstand prolonged high-interest-rate conditions-a point also observed in the Financial Content market commentary.

2026 Forecasts: Balancing Growth and Inflation

Major financial institutions project a mixed inflation outlook for 2026. J.P. Morgan anticipates that goods inflation will moderate as energy prices stabilize, but services inflation-particularly in housing-will remain elevated due to structural labor shortages, according to the Financial Content market minute. Meanwhile, Goldman Sachs forecasts a gradual decline in headline inflation to 2.8% by late 2026, driven by falling energy costs and a slowdown in shelter price growth, as also reported in that market commentary.

These divergent trends underscore the importance of dynamic sector rotation. For example, if goods inflation persists, investors should prioritize commodities and energy. If services inflation dominates, defensive sectors like healthcare and utilities become more attractive. BCG recommends adopting a "digital-first" approach to monitor inflation signals and adjust portfolios accordingly, a recommendation consistent with the EY findings referenced earlier.

Conclusion

The diverging inflation trends in goods and services present both challenges and opportunities for 2026 portfolios. By aligning sector allocations with inflationary drivers-favoring goods-linked sectors during commodity surges and services-linked sectors during labor-driven price pressures-investors can optimize risk-adjusted returns. Coupled with robust risk management tools like real-time inflation tracking and inflation-protected assets, this approach positions portfolios to navigate the complexities of a mixed inflation environment. As central banks grapple with the stickiness of services inflation, the ability to adapt swiftly will be critical to long-term success.