Thursday saw the release of a much lighter-than-expected consumer price report for November, breaking from the recent trend of sticky inflation.
Stocks jumped. Yields fell. Odds of a Federal Reserve rate increased.
And many economists scratched their heads.
The Bureau of Labor Statistics reported that the consumer price index had an annual inflation rate of 2.7% last month, while core CPI – a measure that excludes volatile food and energy prices – was even lower at 2.6%. Both were below than what economists had been estimating, as those polled by Dow Jones called for an annual headline rate of 3.1% and a rate on core CPI of 3%.
The November data release Thursday was delayed by 8 days because of the U.S. government shutdown, but more importantly, the October data was canceled, leaving it to the BLS to make certain methodological assumptions about the prior months’ inflation levels.
Those assumptions in the methodology were not clear to economists and were not fully explained in the release.
“The downside surprise reflects weakness in both goods and services, but may be partly due to methodological issues. The BLS might have carried forward prices in some categories, effectively assuming 0% inflation,” Michael Gapen, chief U.S. economist at Morgan Stanley, said in a note, deeming the November reading as “noisy” in a way that’s “difficult to draw strong conclusions.”
“If these technical factors are the main source of weakness, we could see reacceleration in December,” Gapen added.
The main issue: ‘OER’
Economists were zooming in on one particularly important subset in the data as problematic: owners’ equivalent rent. This is a key part of calculating the inflation seen in the housing market.
UBS economist Alan Detmeister said the price changes in October for the OER appear to have been “set to zero.”
Evercore ISI’s Krishna Guha, digging deeper, said it appears the BLS “put in zero inflation in multiple categories” while calculating the OER for the approximately one-third of cities used.
“To the extent that it introduces a downward bias, the Fed would be mindful of the risk of taking the data on housing services inflation at face value,” he wrote in a Thursday note.
Detmeister said the impact of this could linger for the next few months.
“This weakness should be reversed with very large OER and tenants’ rents increases in the April CPI released in May, but until then the price levels for OER and tenants’ rent will be biased downward,” he said.
Stephanie Roth of Wolfe Research estimated that the 0.13% rise in rent and 0.27% increase in OER across the two-month period comes out to a respective climb of about 0.06% and 0.13% month over month.
CNBC has reached out to the BLS for comment.
There were other issues as well.
Roth noted that there was likely downward pressure on certain goods categories since the BLS’s data collection period took place later in November, a time when there’s “more holiday discounting.”
“The market seems to be taking the data as a dovish signal, but given the technical quirks we expect the Fed will put less weight on this reading,” she said in a note to clients. “While its positive inflation doesn’t appear to be rising strongly on the back of tariffs, there will likely be a bounce back as the data normalizes after the shutdown-related volatility.”
To be sure, there was already some skepticism toward the report in the leadup to its release, with some on Wall Street raising concerns around bias due to impacts from the shutdown, which ended in mid-November.
The enthusiasm on Wall Street that followed the release eased as the trading day continued. Stocks were off their highs, with technology stocks doing most of the heavy lifting and shares more linked to the economy like banks in the red. Yields were off their lows as well.
— With reporting by Steve Liesman
