On Thursday, a significantly softer-than-anticipated consumer price report for the month of November was released, deviating from the recent pattern of persistent inflation.
Stocks surged. Yields dropped. The probability of an increase in Federal Reserve rates heightened.
Numerous economists were left pondering.
The Bureau of Labor Statistics indicated that the consumer price index displayed an annual inflation rate of 2.7% last month, while the core CPI — a measure that omits volatile food and energy prices — recorded an even lower rate of 2.6%. Both figures fell short of economists’ predictions, with those surveyed by Dow Jones projecting an annual headline rate of 3.1% and a core CPI rate of 3%.
The November data, released Thursday, experienced an 8-day delay due to the U.S. government shutdown, but more critically, the October data was scrapped, compelling the BLS to make certain methodological assumptions regarding the inflation levels of the prior month.
These methodological assumptions were opaque to economists and were not thoroughly elucidated in the release.
“The unexpected downside reflects shortcomings in both goods and services, and might be partially attributed to methodological factors. The BLS could have carried over prices in several categories, essentially presuming 0% inflation,” stated Michael Gapen, chief U.S. economist at Morgan Stanley, in a note, labeling the November figure as “noisy” in a manner that makes it “challenging to derive robust conclusions.”
“If these technical elements are the primary source of weakness, we might witness a resurgence in December,” Gapen suggested.
The central concern: OER
Economists were focusing closely on one notably significant subset of the data as concerning: owners’ equivalent rent. This is a crucial component in calculating inflation within the housing market.
UBS economist Alan Detmeister noted that the price alterations for the OER in October seemed to have been “set to zero.”
Evercore ISI’s Krishna Guha, delving further, observed that it seemed the BLS “inserted zero inflation in numerous categories” while determining the OER for roughly one-third of cities included.
“To the extent that this results in a downward bias, the Fed would be cautious of the risk associated with accepting the data on housing services inflation at face value,” he remarked in a Thursday note.
Detmeister indicated that the ramifications of this might persist for the upcoming months.
“This weakness is expected to be reversed with substantial increases in OER and tenants’ rents in the April CPI due out in May, but until then, the price levels for OER and tenants’ rents will be skewed downward,” he commented.
Stephanie Roth of Wolfe Research estimated that the 0.13% increase in rent and 0.27% uptick in OER over the two months translates to respective gains of approximately 0.06% and 0.13% month-over-month.
CNBC has reached out to the BLS for a response.
Additional challenges were noted as well.
Roth pointed out that certain categories of goods may have faced downward pressure, as the data collection by the BLS occurred later in November, a period characterized by “more holiday discounting.”
“The market appears to perceive the data as a dovish indication, but given the technical oddities, we anticipate that the Fed will assign less importance to this reading,” she mentioned in a note to clients. “Although positive inflation does not seem to be rising strongly due to tariffs, there is likely to be a rebound as the data normalizes following the shutdown-driven volatility.”
Notably, skepticism had already emerged regarding the report ahead of its release, with some on Wall Street voicing concerns about bias stemming from the shutdown’s impacts, which concluded in mid-November.
The enthusiasm on Wall Street that followed the report’s release diminished as the trading day progressed. Stocks retreated from their peaks, with technology shares driving most gains while economically sensitive shares, like banks, traded lower. Yields also eased from their lows.
— With reporting by Steve Liesman
