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Wall Street economists have warned that November’s US inflation report was flawed due to missing data because of the recent government shutdown.
Thursday’s consumer price reading of 2.7 per cent was well below expectations of a 3.1 per cent increase among economists polled by Bloomberg, and September’s rise of 3 per cent.
Core inflation, which strips out volatile food and energy prices, rose 2.6 per cent in the Bureau of Labor Statistics figures, compared with expectations of 3 per cent.
The report comes after the recent government shutdown halted data collection for a record six-week period, forcing the BLS to scrap its October inflation report and estimate many prices rather than using observed data from surveys, a process known as “imputing”.
Michael Hanson, a senior economist at Wall Street bank JPMorgan, said the lower than expected figures “suggest that the BLS may have held fixed a number of prices it was not able to collect in October, which likely means a material downward bias in the current numbers that will be reversed in coming months as full price collection resumes”.
Diane Swonk, chief economist at KPMG US, added that “because it was a shortened survey month you’ve got to take it with a grain of salt”.
She added: “Things that should be going up are going down and things that should be going down are going up. So it’s confusing and it doesn’t quite square with prices that we’ve observed.”
The BLS has imputed heavily in recent months, in part due to a slashed budget for its field operations. In September it imputed as much as 40 per cent of its CPI inputs, but it did not say what the figure was for November.
It noted on Thursday that “for a few indexes, BLS uses nonsurvey data sources instead of survey data to make the index calculations”.
Yields on short-term government debt decreased slightly following the report, pushing prices higher, but quickly reversed those moves. The two-year Treasury yield briefly fell to a two-month low of 3.43 per cent.
The S&P 500 rose 0.9 per cent shortly after the market opened, and the Nasdaq Composite rose 2.4 per cent.
“Markets don’t care because the data doesn’t pass the smell test,” said Jon Hill, head of US inflation strategy at Barclays.
“Given the lack of explanation about how the BLS made these decisions, it’s hard to take at face value. Because it was such a big miss, and because it’s so hard for the market to take the data literally, investors don’t want to bet the house.”
Inflation had remained stubbornly elevated in recent months, providing a political issue for President Donald Trump as voters grow frustrated with a worsening cost-of-living crunch.
The White House was quick to seize on Thursday’s release as evidence that Trump’s policies were helping to curb inflation. “I’m not saying that we are going to declare victory yet on the price problem, but this is just an astonishingly good CPI report,” said Kevin Hassett, director of the National Economic Council and a frontrunner to be next chair of the Federal Reserve.
Thursday’s report could spur further calls from the president for the Fed to cut rates more quickly. Trump has repeatedly lashed out at current chair Jay Powell over the pace of cuts, calling him a “moron”.
But analysts were circumspect as to how much the data would affect the central bank’s approach to monetary policy.
The US central bank voted last week to reduce borrowing costs to a three-year low following a divisive meeting in which policymakers debated whether to prioritise risks to inflation or the labour market.
Some members of the rate-setting Federal Open Market Committee have warned that cutting rates too quickly risks exacerbating inflation, while others argue reductions are necessary to support a weak labour market.
Separate data released by the BLS this week showed the US unemployment rate ticked up to a four-year high in November.
Three FOMC members dissented from last week’s decision, which reduced borrowing costs by 0.25 percentage points for the third time this year, leaving them within a range of 3.5 to 3.75 per cent.
Kansas City Fed chief Jeff Schmid and Chicago Fed head Austan Goolsbee warned against complacency over inflation levels as they called for rates to be held steady.
Fed governor Stephen Miran, a Trump ally, wanted a more substantial cut of 0.5 percentage points. He said this week that “phantom inflation” was distorting the US central bank’s decision-making and argued the underlying rate was much lower.
