The U.S. government's November core inflation unexpectedly dropped to its lowest level in over four years, but this seemingly positive signal is facing widespread skepticism from economists. The record-long government shutdown disrupted data collection, significantly undermining the credibility of the inflation report.
The Bureau of Labor Statistics (BLS) reported on Thursday 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 headline CPI increased 2.7%, below economists' expectations of 3% and 3.1%, respectively.
The report showed core CPI rose just 0.2% over the two months ending in November. However, with the government shutdown lasting 43 days until November 12, the BLS failed to collect most October price data, leaving both month-over-month and year-over-year figures potentially distorted.
Federal Reserve Chair Jerome Powell had previously warned that CPI data "could be distorted." Following the release, multiple economists noted that housing costs—one of CPI's largest components—remained nearly flat over two months, raising doubts about the entire estimate.
Omair Sharif, founder of Inflation Insights, suggested missing October rent data may have artificially suppressed November's inflation figures. Nick Timiraos, a prominent Fed reporter, shared Sharif's critique on social media, calling the BLS's assumption of zero growth in October rents and owners' equivalent rent (OER) "completely unacceptable."
Despite market reservations, U.S. stocks rallied post-release, with major indices opening higher. The dollar and Treasury yields hit daily lows. Interest rate futures now price in a 22% chance of a January Fed rate cut, with traders expecting two cuts next year.
**Data Collection Flaws Under Fire** Economists criticized the BLS's methodology, noting delayed data collection into Black Friday sales may have further skewed results. Heather Long of Navy Federal cautioned against overinterpreting the data due to shutdown impacts, while Paul Ashworth of Capital Economics called the sudden stagnation in services inflation "unusual outside recessions."
Sharif highlighted that zeroed October rent/OER data will artificially depress year-over-year figures until April unless adjusted. Wells Fargo economists added that broad-based slowdowns deepened suspicions of shutdown-induced distortions.
The BLS acknowledged data collection resumed two days after the shutdown ended, with 60% of prices typically gathered via in-person visits. Limited alternative data sources were used, but the agency hasn't responded to media inquiries.
**Divergent Views on Rate Cuts** Some see the report opening the door for Fed easing. Seema Shah of Principal Asset Management argued the surprise cooling justifies earlier cuts, while Morgan Stanley’s Ellen Zentner noted inflation is "moving in the right direction." Bloomberg Economics cautiously raised odds of a January cut, projecting 100bps of 2026 reductions.
However, UBS’s Alan Detmeister dismissed much of the report as "noise," urging focus on future data.
**Housing Data Anomalies** Housing costs rose 3% annually—the smallest increase in four years—while other services ex-housing/energy matched 2021 lows. Declines in hotels, apparel, and airfares offset rises in furniture and personal care items. Energy prices jumped 4.2%, led by electricity (+6.9%).
**Tariffs and Outlook Uncertainties** Powell expects goods inflation to peak in Q1 absent new tariffs, though Trump’s policies have gradually pushed prices up. Pantheon Economics estimates retailers have passed through 40% of tariffs so far, potentially reaching 70% by March.
Fitch’s Olu Sonola emphasized next month’s data will clarify true inflation trends, while RSM’s Joseph Brusuelas noted persistent cost pressures in energy (+4.2%), healthcare (+3.3%), and housing explain Americans’ "affordability crisis" perception.
The report’s impact on divided Fed policymakers remains unclear. Recent wage data showed real average hourly earnings up 0.8% annually, as jobless claims fell to 222,000, highlighting seasonal volatility.
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