U.S. CPI cools down, but don’t celebrate too soon: Economists suspect government shutdown distorted the data, some point out obvious errors.

The official US data released shows that core inflation for November unexpectedly fell to the lowest level in more than four years. However, this seemingly positive signal is being widely questioned by economists, because a record-long government shutdown hindered data collection efforts, significantly undermining the credibility of the inflation report.

The report released this Thursday by the US Bureau of Labor Statistics (BLS) showed that the core Consumer Price Index (CPI), excluding food and energy, rose 2.6% year-over-year in November, the slowest pace since March 2021. The overall CPI for the month rose 2.7% year-over-year. Economists had expected increases of 3% and 3.1% respectively.

The report shows that over the two months ending in November, core CPI only rose by 0.2%. But due to the government shutdown lasting 43 days until November 12, the BLS was unable to collect most of October's price data, making it not only impossible to provide month-over-month data, but possibly distorting year-over-year data as well.

Federal Reserve Chair Powell had previously warned that CPI data "may be distorted." After this CPI release, several economists pointed out that housing prices—one of the largest components of CPI—remained essentially flat over two months, something highly unusual and resulting in widespread skepticism about the overall estimate.

Omair Sharif, founder of inflation tracking and forecasting firm Inflation Insights, said the missing October rental data may have artificially suppressed November's inflation data. Nick Timiraos, a veteran Fed reporter sometimes called the "new Fedwire," echoed Sharif’s comments on social media:

"This is totally unacceptable. BLS actually assumed the October rent and owners’ equivalent rent (OER) were zero. I'm sure they have a technical explanation, but to end up with two months' average rent growth of 0.06% and OER growth of 0.135%, the only way is to assume zero growth for October. That’s clearly the wrong approach, but that's what was done anyway."

Despite market skepticism towards the data, US stocks rebounded after the release, with the three major indices opening higher on Thursday. After the CPI release, the dollar and US Treasury yields hit daily lows. Rate futures market pricing now suggests investors see the odds of a Fed rate cut in January rising to about 22%, with traders expecting two rate cuts next year. Pricing fully reflects expectations of one rate cut by midyear.

Major Flaws in Data Collection

Several economists criticized the BLS’s data collection process. In addition to the missing data during the government shutdown, economists suggest that collecting data during the "Black Friday" discount period may have further distorted results.

Heather Long, Chief Economist at Navy Federal, commented: “November inflation was below expectations. But given the significant impact of the government shutdown on data collection, it's hard to draw too many conclusions from these numbers.” She showed screenshots from "Table A" in this CPI report, highlighting many missing data points.

Paul Ashworth, Chief North American Economist at Capital Economics, pointed out in his report:

This CPI report "perhaps does reflect a reduction in inflation pressures, but for such pressures to suddenly stop, especially in relatively stable sectors like housing rent, is very rare, and such phenomena in non-recession periods are highly abnormal."

“So, it looks like we'll have to wait until next month's December data release to determine whether this is a statistical anomaly or a genuine downward move in inflation.”

Omair Sharif pointed out on social media that the main issue is that October rent and OER data were set to zero. "This will artificially depress the year-over-year growth rate until April (assuming BLS doesn't adjust). Another problem is, since price collection only happened in the second half of November, many core goods prices fell due to more discounts. These should rebound in December."

Economists at Wells Fargo said: "The inflation slowdown touched almost every category, deepening our doubts about data problems caused by the government shutdown. Data collection didn't begin until late November, which likely skewed the sample more than we previously expected."

BLS said its data collection didn’t start until two days after the shutdown ended, whereas normally it runs throughout the month. While the agency granted extra collection time, CPI relies primarily on physical visits to retail stores and service providers nationwide for about 60% of its sample. The agency stated that the use of non-survey data in indices is "very limited," but has yet to respond to media requests for comment.

Wall Street Divided Over Rate Cuts

Despite doubts about data reliability, some market participants believe this opens the door for Fed rate cuts. Seema Shah of Principal Asset Management said: "The unexpected drop in November inflation gives the Fed's doves a strong case for a January rate cut. While data distortions cannot be ruled out, the sharp annual decline in inflation gives the Fed little reason not to respond to rising unemployment." She expects two rate cuts in 2026, but today’s CPI data increases the chances of cuts coming in the first half rather than the second.

Ellen Zentner, of Morgan Stanley Wealth Management, said: "The Fed said it is 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 gives slightly more room for further cuts."

Bloomberg Economics' economists were more cautious: "Although we are skeptical of this report, we do see some real signs of inflation easing and the likelihood of a rate cut in January has increased. We expect the Fed will cut rates by a total of 100 basis points in 2026."

However, not everyone is optimistic. Alan Detmeister, an economist at UBS, said: “I think this report should basically be set aside. Maybe there’s a small downward signal for overall inflation, but most of it is just noise and should be ignored.”

Breakdown Shows Abnormal Housing Costs

Excluding food and energy, goods prices rose 1.4% year-over-year, slower than the 1.5% rise in August and September. Using third-party data, BLS managed to publish monthly changes for some categories. New car prices increased 0.2%, up from a 0.1% rise the previous month; growth in used-car prices slowed.

Housing costs were the biggest concern. Housing prices rose 3% year-over-year, the smallest gain in over four years. Another services indicator monitored by the Fed (excluding housing and energy costs) rose 2.7% in November 2024 year-over-year, matching the smallest annual increase since 2021. Service prices excluding energy in housing rose 3% year-over-year.

Hotel, recreation, and apparel prices fell, limiting core CPI growth. Airfares and hotel accommodation prices dropped compared to a year ago. Furniture and personal care products saw price increases. Energy prices rose 4.2% year-over-year, electricity prices 6.9%, and gasoline just 0.9%.

Tariffs and Economic Outlook Remain Key Variables

Powell said that barring new major tariff news, goods inflation is expected to peak in the first quarter. However, Trump’s broad-based tariffs have already pushed up prices of many goods, although the tariff impact is more gradual. Samuel Tombs, Chief US Economist at Pantheon Macroeconomics, calculated that by September, retailers had passed on roughly 40% of tariffs, and expects the share to gradually rise to 70% by March before stabilizing.

Olu Sonola, Head of US Economic Research at Fitch Ratings, said: "Missing details and the lack of data collection during the government shutdown have raised unavoidable doubts. We’ll have to wait until next month for a clearer picture of inflation."

Joseph Brusuelas, Chief Economist at RSM, pointed out that looking at year-over-year details, energy prices rose 4.2%, electricity 6.9%, used cars 3.6%, housing 3%, and healthcare services 3.3%. "These data explain why Americans' sense of the affordability crisis is very real."

It’s still unclear whether this CPI report will sway Fed policymakers, who remain divided about the path of rates next year. Last week, the Fed decided to cut rates by 25 basis points for a third consecutive monetary policy meeting, in order to guard against further deterioration in the labor market.

A report released Thursday combining inflation data with recent wage data showed US real average hourly earnings rose 0.8% year-over-year. Other data released Thursday showed initial jobless claims last week fell to 222,000 from 236,000 a week earlier, coming off a spike and highlighting the volatility in the data at this time of year.

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