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Author: Li Dan, Wall Street News
U.S. official core inflation unexpectedly fell to its lowest level in more than four years in November, but this seemingly positive signal is being widely questioned by economists because the record-long government shutdown has hampered data collection and greatly undermined the credibility of the inflation report.
A report released by the U.S. Bureau of Labor Statistics (BLS) on Thursday showed that the core consumer price index (CPI) excluding food and energy increased by 2.6% year-on-year in November, the lowest growth rate since March 2021. The overall CPI increased by 2.7% year-on-year in that month. Economists expected growth rates of 3% and 3.1% respectively.
The report showed that core CPI rose only 0.2% in the two months to November.However, because the government shutdown lasted for 43 days until November 12, BLS was unable to collect most of the price data for October. Not only was it unable to provide month-on-month data, but year-on-year data may also be distorted.
Federal Reserve Chairman Powell previously warned that CPI data “may be distorted.”After the announcement of the CPI, many economists pointed out that housing prices, one of the largest components of the CPI, were basically flat within two months. This abnormal phenomenon cast doubt on the entire estimate.
Omair Sharif, an economist and founder of inflation watcher and forecaster Inflation Insights, said the lack of rental data in October may have artificially depressed November’s inflation data.Nick Timiraos, a veteran Fed reporter known as the “New Federal Reserve News Service”, forwarded Shariff’s comments on social media and said:
“This is completely unacceptable. The BLS is assuming that October’s rent and owner’s equivalent rent (OER) are zero. I believe they must have a good technical explanation, but the only way to come to the conclusion that the two-month average rent (increase) is 0.06% and OER (increase) is 0.135%, is to assume that October’s (increase) is zero. This is a wrong approach anyway, but it is done.”
Although the market had reservations about the data, U.S. stocks still rebounded after the data was released. The three major stock indexes opened higher on Thursday, and the U.S. dollar and U.S. Treasury yields hit daily lows after the CPI was released.Pricing in the interest rate futures market shows that investors expect the probability of a rate cut by the Federal Reserve in January to rise slightly to about 22%, and traders expect two rate cuts next year.Prices have fully priced in expectations of a rate cut by the middle of next year.
Major flaws in data collection
Several economists have criticized the BLS’s data collection process.In addition to the lack of data during the government shutdown, economists believe that the delay in data collection until the “Black Friday” discount period may further distort the data.
Heather Long, chief economist at Navy Federal, commented: “The inflation rate in November was lower than expected. However, considering the huge impact of the government shutdown on data collection, it is difficult to interpret too much into these data.” He took a screenshot showing that there are many data missing in “Table A” in the BLS CPI report.
Paul Ashworth, chief economist for North America at Capital Economics, noted in the report:
This CPI report “may indeed reflect a reduction in inflationary pressure, but (inflationary pressure) has stopped so suddenly, especially in the service industry where housing rents and other (prices) are relatively stable. It is very rare. At least in non-recession periods, such a phenomenon is an anomaly.”
“The upshot is that it looks like we’ll all have to wait until December’s data is released next month to determine whether this is a statistical anomaly or a genuine decline in inflation.”
Omair Sharif pointed out on social media that the main problem is that rent and OER data for October were zeroed out.”This will artificially depress year-over-year growth until April (assuming no adjustments to the BLS). Another issue is that since price collection only takes place in the second half of November, many core commodity prices weaken due to more discounts. This should rebound in December.”
Economists at Wells Fargo said: “The slowdown (inflation) affects almost all categories, which deepens our doubts about data problems caused by the government shutdown. Data collection did not start until late November, which may bias the sample beyond our previous expectations.”
The BLS said its data collection began two days after the government shutdown ended, whereas it typically collects data throughout the month.Although the agency approved additional collection time, the CPI mainly relies on on-site visits to retail stores and service agencies across the United States to collect prices. Such data accounts for about 60% of the sample.The agency said the number of indexes compiled using non-survey data was “very limited” but did not respond to requests for comment.
Wall Street divided on prospect of rate cuts
Although there are doubts about the reliability of the data, some market participants still believe that this opens up space for the Federal Reserve to cut interest rates.Seema Shah of Principal Asset Management said: “November’s unexpected fall in inflation gives the Fed dovish a strong case for a rate cut in January. Although data distortion cannot be ruled out, the sharp decline in annual inflation gives the Fed little reason not to respond to rising unemployment.” She expects two rate cuts in 2026, but today’s CPI data raises the possibility that a rate cut will fall in the first half of the year rather than the second half.
Ellen Zentner of Morgan Stanley Wealth Management said: “The Fed said it was in ‘wait and see mode’ and today it saw inflation moving in the right direction. Inflation may still be above target, but today’s data leaves a little more room for further rate cuts.”
Economists at Bloomberg Economics said more cautiously: “While we have reservations about this report, we do think there are some real signs of slowing inflation and the possibility of a rate cut in January has increased. We expect the Fed to cut interest rates by a cumulative 100 basis points in 2026.”
However, not everyone is optimistic.Alan Detmeister, an economist at UBS, said: “I think this report should basically be put aside. Maybe this report provides a small downward signal for overall inflation, but the vast majority of it is just noise and should be ignored.”
Breakdown data shows housing cost anomaly
The report showed that excluding food and energy, commodity prices rose 1.4% year-on-year, lower than the 1.5% increase in August and September.Using data collected from third-party sources, BLS is able to publish monthly price changes for select categories.New car prices rose 0.2%, compared with a 0.1% increase in the previous month; second-hand car price increases slowed.
Housing costs have become the biggest concern.Housing prices rose 3% year-on-year, the smallest increase in more than four years.Another service indicator that the Fed focuses on monitoring (excluding housing and energy costs) rose 2.7% from November 2024, which was the same as the smallest year-on-year increase since 2021.Housing costs, excluding energy services, rose 3% year-on-year.
Falling hotel, leisure and clothing prices limited core CPI growth, with air tickets and hotel accommodation prices falling compared with the same period last year.Prices for furniture and personal care products were higher.Energy prices increased by 4.2% year-on-year, electricity prices increased by 6.9%, and gasoline prices increased by only 0.9%.
Tariffs and economic outlook remain key variables
Powell said that without major new tariff news, goods inflation is expected to peak in the first quarter.However, Trump’s sweeping tariffs have pushed up prices for many goods, although the tariffs have been passed on more gradually.Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, calculates that retailers have passed on about 40% of tariffs as of September, and expects this proportion to gradually increase to 70% and stabilize by March.
Olu Sonola, head of U.S. economic research at Fitch Ratings, said: “The lack of detail and the absence of data collection during the government shutdown raises doubts that are difficult to ignore. We will need to wait until next month to get a clearer picture of the state of inflation.”
Joseph Brusuelas, chief economist at RSM Accounting Firm, pointed out that from the year-on-year data details, energy prices increased by 4.2%, electricity increased by 6.9%, used cars increased by 3.6%, housing increased by 3%, and health care services increased by 3.3%. “These data illustrate why Americans’ perception of the affordability crisis is real.”
It’s unclear whether the CPI report will sway Federal Reserve policymakers, who remain divided on the path for interest rates next year.Last week, the Federal Reserve decided to cut interest rates by 25 basis points at its third consecutive monetary policy meeting to prevent further deterioration in the labor market.
A report released on Thursday that combined inflation data with recent wage data showed that real average hourly wages in the United States increased by 0.8% year-on-year.Other data released on Thursday showed that the number of people filing for unemployment benefits fell to 222,000 last week from 236,000 the previous week, a decline after a surge the previous week and highlighting the volatility of data this time of year.
