City were 2-0 up at Molineux, despite having goalkeeper Ederson sent off after 12 minutes. The lead slipped away when Adama Traore, Raul Jimenez and Matt Doherty hit back for Wolves.
The result has left City 14 points behind leaders Liverpool, and Guardiola offered a bleak assessment of his side's chances of retaining the title to BBC Radio 5 Live (h/t BBC Sport): "The advantage is too big, yes. It's unrealistic to think about Liverpool, we think about Leicester. We have the chance to recover second place. I know the quality of my team but that's the situation."
Admitting he and his squad are playing for second with half of the league campaign still to go may sound defeatist from Guardiola. However, it's also a realistic appraisal of his team's ability to claw back twice the points deficit they retrieved to retain the title last season.
The Reds have yet to lose in the league this season, and not even the extra strain of winning the FIFA Club World Cup has slowed their momentum. Liverpool returned from the tournament to beat second-place Leicester City 4-0 away from home on Boxing Day.
Leicester losing opened the door for City to take second spot, but familiar defensive failings put paid to those hopes.
A threadbare unit still missing the services of key centre-back Aymeric Laporte, who has been out with a long-term knee injury, continues to undermine City's considerable attacking talent.
A team capable of scoring goals in bunches but unable to keep clean sheets will always be found out over the course of a long league campaign. Yet the same team can be effective in the shorter, knockout-style format of cup competitions.
City won the FA Cup and Carabao Cup last season and still harbour ambitions of winning the UEFA Champions League. Even so, Guardiola is not ready to declare cup success his priority just yet: "We cannot prioritise or next season we'll not be in Europe. We come back in less than 40 hours to play another game (against Sheffield United). We'll see how (the players) feel. That's what we are going to do."
Raheem Sterling's brace against Wolves, with the second of those goals assisted by Kevin De Bruyne, showed City retain quality in attack few teams can match. De Bruyne and Sterling will welcome the return to fitness of Sergio Augero, even though the striker's comeback was ended after just 13 minutes when he made way for Claudio Bravo, following Ederson's red card:
For all his match-winners up top, there isn't the same level of talent at the base of Guardiola's team, where left-back Benjamin Mendy remains error-prone after his culpability in Wolves' equaliser. Meanwhile, converted holding midfielder Fernandinho hasn't convinced as a makeshift central defender in Laporte's absence. Fernandinho's case hasn't been helped by Nicolas Otamendi's shaky performances next to him.
A paucity of talent at the back is just one problem facing Guardiola, who needs to find new ways to refresh an ageing squad after some questionable spending, according to James Ducker of The Daily Telegraph:
James Ducker @TelegraphDucker
Re rebuild talk, past two summers have yielded Mahrez, Rodri, Cancelo & Angelino. If they’d been better windows they wouldn’t be facing as big a job as they now are. Kompany not replaced. Silva 6 months left. Fernandinho 35 in May. Aguero won’t go on forever. Promoting youth 🤔 https://t.co/m7uO3McjWp
The decision not to sign a replacement for former skipper Vincent Kompany, who left for Anderlecht in the summer, looks increasingly like a major misstep from Guardiola. Adding an established centre-back would have provided credible cover for Laporte.
Having none is the main reason the Citizens have failed to keep pace with Liverpool the way they did last season.