The November CPI report delivered what looked like a major inflation breakthrough—core prices rising just 2.6% year-over-year, the slowest pace since 2021 and well below the 3.0% consensus. But before markets could celebrate, Fed Chair Jerome Powell and several FOMC members issued a clear warning: this data may be distorted.

Ofo's take: "November's CPI showed core inflation slowing significantly to 2.6% year-over-year, but distortions from the government shutdown and truncated data collection make the report more noise than signal. Markets remain cautious, expecting December's figures to correct anomalies in shelter and other categories."

What the headline numbers showed

  • Core CPI: +2.6% YoY—the lowest reading in nearly four years.
  • Headline CPI: Also came in softer than expected.
  • Market reaction: Initial optimism quickly tempered by Fed commentary.

Why the data may be misleading

The record-long government shutdown created a significant data gap. October's price collection was incomplete, and November's survey period was shortened. Economists quickly flagged several anomalies:

  • Missing October data: The gaps effectively assumed no price growth for October, mechanically pulling figures lower.
  • Shelter costs: A key inflation driver showed unusual softness—likely distorted by the collection issues.
  • Airfares and apparel: Both posted unusual declines that analysts view with skepticism.

Analysts have labeled the report "Swiss Cheese" and "Patchy"—colorful ways of saying the data has too many holes to draw firm conclusions.

The Fed's cautious stance

Powell's preemptive warning about potential distortions was notable. It's unusual for the Fed Chair to publicly question data quality before a release. This suggests the FOMC is:

  • Aware of the limitations: They won't overreact to a single distorted print.
  • Data-dependent, but discerning: Not all data points carry equal weight.
  • Focused on the trend: One report won't change the policy path.

What to expect going forward

The housing distortions may persist into spring as the data collection normalizes. However, December's CPI is expected to correct some of the oddities, providing a cleaner read on underlying inflation trends.

  • December CPI: Should offer a more reliable signal.
  • Shelter normalization: May take several months.
  • Fed policy: Likely to remain on hold until cleaner data emerges.

Market implications

  • Rates: Don't expect the Fed to accelerate cuts based on this report alone.
  • Risk assets: Volatility may persist as markets parse noisy data.
  • Watch next: December CPI and any revisions to November figures.

Bottom line

While inflation may indeed be cooling, the November CPI report overstates the slowdown. The government shutdown created data gaps that make it difficult to assess the true inflation picture. Until December's figures provide a cleaner read, markets are right to treat this report as more noise than signal.