Here is the tension that should be on every business owner’s mind this Wednesday morning. The Fed’s benchmark rate sits at 3.75 percent. The personal consumption expenditures measure of inflation, which is the gauge the Fed officially targets, sits at 3.7 percent on a year-over-year basis as of July. That is a gap of five hundredths of a percentage point between the policy rate and the inflation rate. The Fed’s real cushion, adjusted for actual prices, is essentially nothing.

That is not a complaint about the Fed. It is a fact about where we are. And it has real consequences for how you think about the cost of money, the trajectory of prices, and the decisions you make about committing capital over the next year or two.

The inflation story most people are reading wrong

The common read right now is that inflation is coming down. And at the headline level, the direction looks right. But the month-by-month data tells a more complicated story. Looking at just July, the personal consumption expenditures price index, at an annualized monthly pace, is running at roughly 1.9 percent for the headline and about 3 percent for the core, which strips out food and energy. The 3 percent monthly pace for core is below the 3.34 percent year-over-year number, which is genuinely encouraging. It suggests some deceleration. But it is not a clean victory. Core is still running above the Fed’s 2 percent target, and the year-over-year headline number at 3.7 percent sits well above what the Fed is comfortable calling done.

When you look at the CPI breakdown, which measures a different but related basket of consumer prices, the picture gets more textured. Shelter, meaning rent and the implied cost of owning a home, runs at 3.4 percent year over year. Services are at 3.37 percent. Goods, the physical things you buy, are at just under 1 percent. The goods story is calm. The services and shelter story is the engine keeping inflation sticky.

Services inflation is stubborn for a straightforward reason. Services are mostly people. And people cost more when compensation is rising. The labor market data shows compensation growth holding at a steady pace. Unit labor costs have come in soft, and productivity has been decent, which means firms have absorbed some of that wage pressure into margins rather than prices. That is part of why profits as a share of the economy remain elevated, sitting above 13 percent of gross domestic product as of April. But there is a ceiling to how long firms can absorb before prices follow.