A weaker than expected U.S. consumer price report for November surprised markets and economists alike. Inflation readings came in well below forecasts, triggering a rally in stocks, a decline in Treasury yields, and renewed speculation about a possible shift in Federal Reserve policy. However, behind the headline numbers, analysts identified several technical factors that complicate the interpretation of the data.
Inflation Falls Below Expectations
According to the Bureau of Labor Statistics, the consumer price index rose 2.7 percent year over year in November. Core CPI, which excludes food and energy, increased by 2.6 percent. Both figures were significantly below consensus estimates, which had projected inflation closer to 3 percent. The data appeared to mark a sharp break from recent months characterized by persistent and sticky inflation pressures.
Methodological Uncertainty After the Shutdown
The November CPI release was delayed due to the U.S. government shutdown, while the October report was entirely canceled. As a result, the BLS relied on methodological assumptions to fill gaps in the data. Economists noted that these assumptions were not clearly explained, raising concerns about the reliability of the final figures.
Michael Gapen, chief U.S. economist at Morgan Stanley, described the report as noisy and cautioned against drawing firm conclusions. He suggested that some prices may have been carried forward, effectively assuming no inflation in certain categories. If these factors explain the weakness, inflation could reaccelerate in December.
Owners’ Equivalent Rent Under Scrutiny
A key area of concern was owners’ equivalent rent, a major component of housing inflation. Analysts observed that price changes in this category may have been set to zero in some cities, introducing a downward bias. UBS and Evercore ISI economists warned that this could distort housing services inflation and limit how much weight policymakers place on the data.
Stephanie Roth of Wolfe Research estimated that rent and OER increases over the two month period were unusually subdued. She also noted that delayed data collection likely captured more holiday discounting, adding further downward pressure to goods prices.
Market Reaction Moderates
While markets initially reacted positively, enthusiasm faded as the trading session progressed. Technology stocks supported equities, while economically sensitive sectors such as banks declined. Treasury yields also recovered from their lows, reflecting growing skepticism about the durability of the inflation surprise.
The November CPI report delivered a headline cooling of inflation but raised as many questions as it answered. Technical distortions linked to the government shutdown and housing data complicate the outlook. As data normalizes in coming months, policymakers and investors will be watching closely to determine whether the slowdown is genuine or temporary.