New inflation data released for the first time since the government shutdown showed prices unexpectedly slowed in November, but the report may not immediately change the Fed’s outlook due to possible distortions in the data.
“Overall, this looks like good news, but the lack of detail and lack of data collection during the government shutdown raises a level of skepticism that is difficult to ignore,” said Olu Sonora, head of U.S. economic research at Fitch Ratings. “We will need to wait until next month to get a clearer picture of inflation.”
The consumer price index rose 2.7% in November, compared with Wall Street expectations of 3.1%. Excluding volatile food and energy prices, inflation on a “core” basis was 2.6%, compared with expectations of 3%. Core inflation has hovered around 3% for months, leading many at the Fed to worry that inflation has stalled.
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This month’s consumer price index does not include month-on-month data because the government shutdown for a month and a half caused the Bureau of Labor Statistics to cease most price data collection. However, the Bureau of Labor Statistics said both headline and core CPI rose just 0.2% in the two months since September.
Federal Reserve Chairman Jerome Powell warned last week that the central bank would be “skeptical” of November data due to the impact of the government shutdown. In fact, there are major gaps in the data because information was not collected for a month and a half.
Still, many economists believe the latest inflation data shows the central bank is making progress towards its 2% inflation target.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said, “The Fed said it is in ‘wait and see’ mode and today it has to see inflation moving in the right direction. Inflation may still be above target, but today’s data makes further interest rate cuts more likely.”
Although core goods rose 1.4% due to tariffs, falling rents pulled down the headline inflation figure. Services inflation, excluding energy prices, rose 3% – still high but down from 3.5% since September and a category many Fed hawks are watching.
Stephen Miran, a Fed governor appointed by President Trump in September, has repeatedly said he believes the Fed can cut interest rates because rents have fallen. Millan said when rents are included in the calculation of the Consumer Price Index, inflation is lower and any growth from tariffs is undermined, but he hasn’t seen that yet. Thursday’s report underscores Milan’s argument.
Federal Reserve Governor Chris Waller said on Wednesday that he believes inflation will fall in the first half of the year, potentially providing grounds for the Fed to continue cutting interest rates.
“There’s no reason we have to keep interest rates high just because the economy is experiencing positive growth,” Waller said. “That in itself doesn’t cause inflation. But because inflation is still rising, we can take our time. We can steadily lower the policy rate to neutral and keep a close eye on inflation.”
Jeffrey Roach, chief economist at LPL Financial, said he expects inflation data to be volatile in the coming months but expects inflation to fall next year, opening the door to further rate cuts.
“We may get some hotter data as tax returns come in ahead of expectations in early 2026 and demand rises, but we should expect inflation to cool in the second half of next year,” he said.
Paul Ashworth, chief economist for North America at Capital Economics, said the Fed would need to wait until December data is released next month to verify whether the November CPI report is a statistic or genuine deflation.
“This may indeed reflect a real decline in inflationary pressures, but this kind of sudden stop, particularly in the more durable services sector… is very unusual, at least outside of a recession,” Ashworth said.
Jennifer Schonberger covers the Fed, Congress, the White House, Treasury, the SEC, the economy, cryptocurrency, and the intersection of policy and finance in Washington. Follow her on X @Jenniferisms etc. Instagram.
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