Consumer price data for November was released on Thursday, which was much lighter than expected, breaking away from the recent sticky inflation trend.
Stock prices soared. Yield decreased. The probability that the US Federal Reserve (Fed) will decide on policy interest rates has increased.
And many economists scratched their heads.
The U.S. Bureau of Labor Statistics reported annual consumer price index inflation at 2.7% last month, but core CPI, which excludes volatile food and energy prices, was even lower at 2.6%. The Dow Jones survey had the annual headline rate at 3.1% and the rate relative to core CPI at 3%, both of which were lower than economists expected.
Thursday’s release of November statistics was delayed by eight days due to the U.S. government shutdown, but more importantly, October statistics were canceled, leaving it up to the BLS to make certain methodological assumptions about the previous month’s level of inflation.
These assumptions in the methodology were not clear to economists and were not fully explained in the release.
“While the downside price surprise reflects weakness in both goods and services, it may be due in part to methodological issues. The BLS may have carried forward prices in some categories, effectively assuming 0% inflation,” Michael Gapen, chief U.S. economist at Morgan Stanley, said in a note, calling November’s data “noisy” meaning it is “difficult to draw strong conclusions.”
“If these technical factors are the main cause of weakness, we could see a re-acceleration in December,” Gapen added.
Main issue: OER
Economists have focused on one particularly important subset of the data as problematic. It is the owner’s equivalent rent. This is an important part of calculating the inflation seen in the housing market.
UBS economist Alan Detmeister said OER’s October price change “appears to be set at zero.”
Digging deeper, Evercore ISI’s Krishna Guha said the BLS appears to have “set zero inflation in multiple categories” when calculating OER for about a third of the cities served.
“The Fed will be mindful of the risks of taking data on housing services inflation at face value to the extent that it results in a downward bias,” he said in a note Thursday.
Detmeister said the impact could last for months to come.
“This weakness should reverse if OER and tenant rents increase significantly in the April CPI, which will be released in May, but until then, OER and tenant rent price levels will be biased downwards,” he said.
Stephanie Roth of Wolfe Research estimated that a 0.13% increase in rent and a 0.27% increase in OER over the two-month period would represent month-over-month increases of approximately 0.06% and 0.13%, respectively.
CNBC has reached out to BLS for comment.
There were other problems as well.
Ross said there was likely downward pressure on certain product categories because the BLS data collection period was in late November, when “holiday discounts increase.”
“The market appears to be taking this statistic as a dovish signal, but given the technical idiosyncrasies, we expect the Fed to place less weight on this number,” he said in a note to clients. “Positive inflation does not appear to have increased significantly due to tariffs, but will likely rebound as data normalizes after the government shutdown-related volatility.”
To be sure, there was already some skepticism about the report ahead of its release, with some on Wall Street expressing concerns about bias from the government shutdown that ended in mid-November.
Wall Street’s frenzy following the announcement subsided as the trading day continued. Stock prices were out of the high range, with tech stocks carrying most of the burden, and stocks with strong ties to the economy, such as banks, in the red. Yields also fell below their lowest levels.
—Reported by Steve Liesman
