The off-colour Blues went down to two late Adama Traore counter-attack goals as Wolves became the first Premier League side to win at the Etihad in 10 months.
But the Catalan says his team have recovered difficult situations before and can do it again.
“Of course, it was a bad day,” said Pep. “That sometimes happens. We started quite well and then we conceded two situations with two loose balls in our build up.
“We got a little bit nervous. In the second half we controlled the game better. At the end we were attacking, and they had Cutrone and Jimenez and they were clinical.
“When you talk about the game and the way we played it was not good. It was not a good day."
The City boss also admitted his team have plenty of hard work ahead, with title rivals Liverpool eight points ahead just eight games in.
“It’s a lot of points,” he said. “They’ve not dropped points. Today is the game we created less. We face many teams defending in deep systems. More or less we have found a way to do it, but today we had a problem.
“There’s a lot of games to go. We lost to a good team. They’re physical and strong in the air and fast on the counter-attack and that’s why.
“We have to improve. Maybe we weren’t solid in our build up. When we are, we concede few chances.”
Pep also revealed Kyle Walker had been struggling in the build up to the game, adding: “I made a change because Kyle Walker could not continue. In the first half all the dangerous situations we created were from Joao.
“Kyle had an infection in his stomach in the last few weeks. He didn’t train and lost weight.
“He made an incredible effort today because we needed fast players. At half time he said he didn’t feel good, that’s why we made a substitution.”
Asked if City still have what it takes to challenge for the title, the boss said: “I know these guys, they can still do it. It was a bad day, a bad game.
“Credit to the opponent. What’s happened has happened. Most teams that have won in the past don’t win the year after. Of course, we want to be close.
“Today was the day we were not on our level. The previous games were good. The distance is big, Liverpool have not dropped points.
“Now is the time to come back. The results will dictate the situation, but we are in October and there’s a long way to go.”