U.S. Services-Sector Inflation: A New Era of Independence from Trade Policy Dynamics

The U.S. services sector has emerged as a dominant force in shaping inflationary trends, with its price pressures evolving independently of trade policy dynamics. While tariffs and global supply chain disruptions have historically influenced inflation, recent data and academic analyses underscore a shift toward domestic drivers such as wage growth, input costs, and labor market tightness. This decoupling has critical implications for investors navigating the post-pandemic economic landscape.

Services Inflation: A Structural Shift

From 2023 to 2025, the U.S. services sector accounted for over 60% of the overall Consumer Price Index (CPI) increase, with shelter costs alone surging 6.2% in 2023, according to a BLS review. By August 2025, services inflation stabilized at 3.8%, the highest level since February 2025, driven by medical care (4.2%) and transportation services (3.5%), as reported by the BLS report. Notably, this trend persisted despite a contraction in the services sector in May 2025, as indicated by the Institute for Supply Management's nonmanufacturing PMI dropping to 49.9, according to the same BLS report.

Wage Growth and Labor Market Dynamics

Academic research confirms that wage inflation is a primary driver of services-sector price pressures. A 2024 Cleveland Fed study found that post-pandemic labor market tightness and wage growth were strongly correlated with inflation in education, health, and leisure sectors, with effects manifesting either immediately or with a lag. For instance, motor vehicle insurance prices spiked 20.3% in 2023, reflecting both wage-driven cost increases and input price pressures, as noted in the BLS review. By July 2025, average weekly wages had grown 4.2%, outpacing the 2.7% inflation rate and signaling sustained purchasing power, according to USAFacts data.

Input Costs and Global Trends

While trade policy uncertainty (TPU) has introduced short-term volatility-such as delivery delays and delayed business guidance-services inflation remains anchored by global and domestic factors. The Global Multivariate Core Trend (MCT) Inflation model from the NY Fed model highlights that core goods and energy prices, rather than tariffs, dominate U.S. inflation persistence. Additionally, services input costs surged to 68.7 in Q3 2025, the highest since November 2022, as businesses passed on rising labor and supply chain expenses to consumers, the BLS report shows.

Implications for Investors

The independence of services inflation from trade policy underscores the need for investment strategies focused on labor market indicators and sector-specific dynamics. Sectors like healthcare and education, where wage growth directly translates to inflation, may require hedging against cost-push pressures. Conversely, financial and business services-where wage inflation shows no significant link to price increases-could offer relative stability, the Cleveland Fed study finds.

Conclusion

U.S. services-sector inflation is no longer a byproduct of trade policy but a reflection of deep-seated domestic and global economic forces. As wage growth stabilizes near pre-pandemic levels and input costs remain elevated, investors must prioritize granular analysis of labor markets and sector-specific trends. The era of services inflation as a standalone driver is here to stay, demanding a recalibration of traditional inflation-monitoring frameworks.