Understanding the Recent Inflation Report: A Closer Look
Thursday saw the release of a much lighter-than-expected consumer price report for November, breaking from the recent trend of sticky inflation. 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 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 month’s inflation levels. Those assumptions in the methodology were not clear to economists and were not fully explained in the release.
Methodological Concerns and Their Impact
Michael Gapen, chief U.S. economist at Morgan Stanley, noted that “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,” deeming the November reading as “noisy” in a way that’s “difficult to draw strong conclusions.” Gapen added, “If these technical factors are the main source of weakness, we could see reacceleration in December.”
Economists were zooming in on one particularly important subset in the data as problematic: owners’ equivalent rent (OER), 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.
Technical Factors and Their Implications
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.
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.
Conclusion and Future Outlook
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, such as banks, in the red. Yields were off their lows as well. For more detailed analysis and to understand the implications of these numbers, readers can find the full report Here.
Smart Tip for Readers
When interpreting economic data, especially inflation reports, it’s essential to consider the methodology and potential biases that might affect the numbers, ensuring a more accurate understanding of the economic landscape. Always look for explanations from reputable sources and expert analyses to contextualize the data.
