The November Consumer Price Index (CPI) report released by the U.S. Labor Department has prompted markets to reassess inflation trends. The data showed November CPI rising 2.7% year-over-year, below market expectations of 3.1% and down from October's 3.0%. Core CPI increased 2.6% annually, also below the anticipated 3.0% and marking the lowest level since March 2021. Core goods prices rose 1.4%, while owners' equivalent rent (OER) climbed 3.4%, down from 3.8% in the previous month.
Data Interpretation and Potential Biases
While the lower-than-expected CPI data brought momentary relief to markets, underlying concerns about its accuracy persist. Following the report's release, skepticism emerged regarding potential measurement biases in the data collection process. The Bureau of Labor Statistics (BLS) had assumed zero CPI growth for October due to the temporary government shutdown that month. UBS had previously warned this methodological assumption could create approximately 27 basis points of downward bias in November's CPI report. Adjusting for this potential distortion, the actual CPI might approach 3.0%, aligning more closely with market expectations.
Component Analysis
- Core Goods: The slowdown in core goods price growth reflects easing supply chain bottlenecks and cooling demand. However, persistent geopolitical risks could disrupt global supply chains anew, potentially reigniting goods inflation.
- Owners' Equivalent Rent (OER): The deceleration in OER suggests moderating housing cost pressures. Yet given housing market complexities, OER declines may prove gradual, warranting close monitoring of future data.
Market Reaction and Policy Implications
The USD/JPY exchange rate initially dipped post-release but quickly rebounded, reflecting divided market interpretations. Some investors viewed the cooling inflation as potentially hastening the Federal Reserve's exit from its tightening cycle, while others remained cautious about the data's reliability. Given measurement uncertainties and economic unpredictability, the Federal Reserve will likely maintain policy caution, avoiding overreaction to a single data point.
Conclusion
The unexpected dip in November's CPI offered a glimmer of hope for inflation moderation, but questions about data integrity remain. Assessing inflation trajectories requires holistic consideration of measurement biases, global economic conditions, and geopolitical risks. The Federal Reserve must balance vigilance against premature policy shifts in coming months as subsequent data releases provide clearer signals about inflation's true trajectory.