At first glance, the government’s long-overdue November inflation report seemed to bring good news: consumer prices rose just 2.7% year-on-year, while core inflation fell to 2.6%, the lowest level in years. But to many economists, the numbers raised immediate red flags, especially in the housing market, which is the largest component of inflation.
“It’s a strange number,” said Diane Swonk, chief economist at KPMG. wealth. “By carrying forward September, housing costs were essentially flat in October. That’s really important when housing is such a large component.”
Several economists said the culprit was the prolonged government shutdown, which disrupted the Bureau of Labor Statistics’ ability to collect price data throughout October and into November. When data collection resumed in mid-November, the agency was unable to retroactively collect the missing information. Instead, it relies on statistical assumptions – often “carrying forward” previous prices – effectively treating certain categories as if inflation had stopped entirely.
Housing seems to be the most distorted category. Housing accounts for more than 40% of core CPI, but the November report suggested rents and owner-equivalent rents were essentially zero in October.
“We expected it to cool down,” Swank said. “That seems a little too much for a level that low.”
She warned that these assumptions would affect more than just one month’s worth of data. “Because of the assumptions made in October, it actually anchors the index going forward,” she said. “It lingers.”
Other oddities in the report reinforce this sense of unreliability. Swank said gas prices fell last month but rose on a seasonally adjusted basis. Day-care costs — long one of the fastest-growing components of service-sector inflation — suddenly fell.
RSM chief economist Joseph Brusuelas wrote in a blog post that the November Consumer Price Index (CPI) should be viewed with extreme caution.
“This is a flawed CPI report,” he wrote. “The November Consumer Price Index report was full of noise and lacked the normal breadth and depth that the good people at the Bureau of Labor Statistics usually provide.”
Brussulas said that because the agency was unable to collect prices for October, it was nearly impossible to pinpoint why inflation appeared to be slowing.
“There’s a level of humility required here,” he added. “Due to the reporting flaws, it would be best to state forthrightly that we do not have sufficient knowledge of price movements over the past two months.”
The market seems to agree. Typically, market watchers expect a sharp decline in inflation to trigger a sharp rally in stocks or, in the current situation of good bad data and bad good data, a sell-off in stocks as markets repricing interest rate expectations. Instead, the response was muted. Stocks edged higher and futures markets were little changed, perhaps a sign of widespread skepticism about the report.
