Economists are questioning the reliability of the recent Consumer Price Index (CPI) report, which suggests a downward trend in inflation. The report, released on Thursday, indicates an annual inflation rate of 2.7% and a core CPI of 2.6%, both lower than expected. This has led to a surge in stock prices, a decline in yields, and increased odds of a Federal Reserve rate hike. However, many economists are perplexed by the methodology used by the Bureau of Labor Statistics (BLS) to arrive at these figures.
The November data release was delayed by 8 days due to the U.S. government shutdown, and the October data was canceled, forcing the BLS to make assumptions about previous months' inflation. These assumptions, according to economists, were not clear and were not fully explained in the report. Michael Gapen, a chief U.S. economist at Morgan Stanley, described the November reading as 'noisy' and suggested that methodological issues might be a factor. He mentioned that the BLS might have carried forward prices in certain categories, effectively assuming 0% inflation.
The main concern among economists is the 'owners' equivalent rent' (OER) category, which is crucial in calculating housing market inflation. Alan Detmeister from UBS noted that the price changes for OER in October appear to have been set to zero. Krishna Guha from Evercore ISI further analyzed this, suggesting that the BLS applied zero inflation in multiple categories while calculating OER for approximately one-third of cities. This could introduce a downward bias in the data, which the Federal Reserve might need to consider carefully.
Stephanie Roth from Wolfe Research estimated that the slight increase in rent and OER over a two-month period might be more significant when viewed on a month-over-month basis. Other factors, such as the timing of data collection and holiday discounting, could also contribute to downward pressure on certain goods categories. Despite these technical quirks, the market has interpreted the data as a dovish signal, but economists expect the Federal Reserve to put less weight on this reading.
The skepticism towards the report predates its release, with concerns about bias due to the government shutdown's impact. As the trading day progressed, Wall Street's enthusiasm waned, with technology stocks and economy-linked shares experiencing declines. Yields also retreated from their lows. The controversy surrounding the report's methodology and potential biases has sparked discussions, inviting economists and investors to share their thoughts and interpretations.
