Trust these numbers? Economists see a lot of flaws in delayed CPI report showing downward inflation
A much lighter-than-expected consumer price report was released for November on Thursday, breaking with the recent sticky inflation trend.
Stocks skyrocketed. Efficiency dropped. The possibility of the Fed’s interest rate has increased.
And many economists scratched their heads.
The Bureau of Labor Statistics reported that the annual inflation rate for the consumer price index last month was 2.7 percent, while the core CPI, which excludes volatile food and energy prices, was even lower at 2.6 percent. Both were below economists’ forecasts; Dow Jones survey respondents were calling for the annual headline interest rate to be 3.1% and the core CPI rate to be 3%.
The release of November data on Thursday was delayed by 8 days due to the US government shutdown, but more importantly the October data was canceled and it was left to the BLS to make certain methodological assumptions about the previous month’s inflation levels.
These assumptions in the methodology were not obvious to economists and were not fully explained in the publication.
“The downside surprise reflects weakness in both goods and services, but may be due in part to methodological issues. The BLS may have moved prices forward in some categories assuming effectively 0% inflation,” Michael Gapen, Morgan Stanley’s chief U.S. economist, said in a note. he said, describing the November reading as “noisy” in a way that “it’s difficult to draw strong conclusions.”
“If these technical factors are the main source of weakness, we could see a reacceleration in December,” Gapen added.
Main issue: OER
Economists were focusing on a particularly important subset of the data that appeared problematic: property owners’ equivalent rent. This is an important part of calculating inflation in the housing market.
UBS economist Alan Detmeister said October price changes for OER appeared to be “set to zero.”
Digging deeper, Evercore ISI’s Krishna Guha said the BLS “puts zero inflation in multiple categories” when calculating OER for about a third of the cities used.
“To the extent that it reveals a downward trend, the Fed will be wary of the risk of taking data on housing services inflation at face value,” he wrote in a note on Thursday.
Detmeister said the impact of this could last for the next few months.
“This weakness should be reversed by very large OER and tenant rent increases in the April CPI published in May, but until then OER and tenant rent price levels will trend downward,” he said.
Stephanie Roth of Wolfe Research estimates that a 0.13% increase in rent and a 0.27% increase in OER over a two-month period led to a month-over-month increase of approximately 0.06% and 0.13%.
CNBC has reached out to BLS for comment.
There were other problems too.
Roth noted that there may be downward pressure on certain product categories since the BLS’s data collection period occurs toward the end of November, when there are “more holiday sales.”
“The market appears to be taking the data as a dovish signal, but we expect the Fed to put less weight on it given the technical quirks,” he said in a note to clients. “While positive inflation does not appear to be rising strongly due to the impact of tariffs, there will likely be a rebound as data normalizes following the lockdown-related volatility.”
Of course, there were some doubts about the report before it was published; some were on Wall Street. Concerns about bias are growing due to the effects of the shutdown, which ended in mid-November.
The enthusiasm on Wall Street following the announcement faded as the trading day continued. Stocks were at high levels; technology stocks were doing most of the work, and stocks more linked to the economy, such as banks, were in the red. Yields were also low.
— With reporting from Steve Liesman
