US consumer prices likely snapped back after being restrained by government shutdown distortions

WASHINGTON, Jan 13 (Reuters) – U.S. consumer prices likely accelerated in December as some distortions related to the government shutdown eased in an artificially lower inflation rate in November, bolstering expectations the Federal Reserve will keep interest rates on hold this month.

The 43-day shutdown prevented the collection of October prices, leading the Bureau of Labor Statistics to use a carry-forward method to extrapolate data (particularly rent) to compile the November CPI report. Although prices are collected in November, they are not collected until the second half of the month when retailers offer holiday season discounts.

This distortion is prevalent in rent indicators and commodity prices. News emerged last week that despite tepid job growth, the unemployment rate fell in December and consumer inflation expectations are set to pick up.

“We expect the CPI report to show meaningful returns following the collection issues due to the government shutdown,” said Oscar Munoz, chief U.S. macro strategist at TD Securities. “However, we will not see a complete reversal in consumer prices as rental returns will have to wait until the April 2026 report.”

A Reuters poll of economists predicted that CPI may have risen 0.3% last month due to rising food and energy prices, mainly electricity for data centers. CPI is expected to rise 2.7% in the 12 months to December, matching November’s rise.

The US Bureau of Labor Statistics expects CPI to rise 0.2% from September to November. The carryforward imputation method treats October prices as unchanged. Rising inflation has dented President Donald Trump’s approval ratings and will remain a political flashpoint in 2026 as Trump and his fellow Republicans fight to retain control of the U.S. Congress.

Prices are expected to rise significantly

Economists expect prices to rise, especially for items such as new motor vehicles, furniture and clothing, although a tendency toward soft rentals is likely to persist. The BLS uses 6 months of panel collection to calculate rent and landlord equivalent rent. It said at the end of December that “the impact of the carry-forward imputation method used in October 2025 will be resolved when the housing panel is used again in April 2026.”

The BLS estimates one-month price changes for rent and owner-equivalent rent using the sixth power of the six-month price change for the sample collected in November, and then derives the index level for that month based on the October index level.

In addition to distortions from the shutdown, economists expect November’s CPI report to show that Trump’s sweeping tariffs are gradually being passed on to higher inflation that prevailed before the longest government shutdown on record. Businesses largely absorb some of the import tariffs.

“Given the prevalence of holiday discounts in the sector, the rebound in goods prices is likely to be more pronounced than in services,” said Sarah House, senior economist at Wells Fargo. “Services price growth should also rebound in December, particularly in the more seasonally sensitive lodging and airfare categories.”

Excluding the volatile food and energy components, CPI is expected to have risen 0.3% in December. So-called core CPI is expected to rise 2.7% year-on-year in December after rising 2.6% in November. The U.S. Bureau of Labor Statistics expects core CPI to rise 0.2% from September to November.

The Fed tracks the Personal Consumption Expenditures Price Index to achieve its 2% inflation goal. The U.S. central bank is expected to keep its benchmark overnight rate in a range of 3.50%-3.75% at its meeting on January 27-28.

Tensions have escalated between Federal Reserve Chairman Jerome Powell and Trump, leading most economists to not expect Powell to cut interest rates until his term ends in May. The Trump administration has opened a criminal investigation into Powell, which the Fed chairman called an “excuse” to influence interest rates.

“Washington is creating a lot of uncertainty, which is obviously bad for the economy, and I think it could ultimately lead to higher inflation,” said Sung Won Sohn, a professor of finance and economics at Loyola Marymount University. “We want low interest rates, but this is not the way to get there.”

(Reporting by Lucia Mutikani; Editing by Nick Zieminski)