'Absence of data' in CPI report flashes yellow for further interest rate cuts
The first fresh inflation reading since the government shutdown showed prices unexpectedly eased in November, though the report may not immediately change the Fed’s outlook because of potential distortions in the data.
“This looks like positive news overall, but the lack of detail and the absence of data collection during the shutdown introduce a degree of skepticism that’s hard to ignore,” said Olu Sonola, head of US economic research for Fitch Ratings. “We’ll need to wait until next month for a clearer read on inflation.”
The Consumer Price Index rose by 2.7% for November, compared with Wall Street's expectations of 3.1%. On a “core” basis, which strips out volatile food and energy prices, inflation clocked in at 2.6%, compared with estimates for 3%. Core inflation had been stuck around 3% for months, causing many at the Fed to worry that inflation had stalled.
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This month’s CPI does not include month-over-month figures because the government was shut down for a month and a half, halting much of the price data collection conducted by the Bureau of Labor Statistics. However, over the two-month period since September, the BLS stated that both the headline and core CPI had risen by only 0.2%.
Fed Chair Jerome Powell warned last week that the central bank would take a “skeptical eye” to the November data because of the impact of the shutdown. Indeed, there were major gaps in the data, given that information wasn’t collected for a month and a half.
Still, many economists think the latest inflation reading shows progress toward the central bank’s 2% inflation goal.
“The Fed said it was in 'wait-and-see' mode, and today it got to see inflation moving in the right direction. Inflation may still be above target, but today’s data made the opening for additional rate cuts just a little wider,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
A drop in rents pulled the overall inflation number down, even as core goods rose by 1.4% on account of tariffs. Services inflation excluding energy prices rose 3% — still high, but down from 3.5% since September and a category many hawks on the Fed are watching.
Fed Governor Stephen Miran, who was appointed by President Trump in September, has repeatedly said he believes the Fed can cut rates because rents have come down. When rents are factored into the calculation of CPI, Miran says inflation is lower and blunts any increase from tariffs, which he doesn't see right now. Thursday’s report underscored Miran’s argument.
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