Wall Street got exactly what it wanted on Thursday: a consumer price report that looked decisively cooler than expected. Stocks surged out of the gate, Treasury yields slid, and traders ramped up bets that the Federal Reserve could soon cut interest rates.
But as the dust settled, unease crept in. For many economists quoted by CNBC, the November inflation report raised as many questions as it answered.
According to the Bureau of Labor Statistics, headline consumer price inflation slowed to 2.7% year-on-year in November, while core inflation — which strips out food and energy — came in even lower at 2.6%. Both readings undershot forecasts by a wide margin. Economists surveyed by Dow Jones had expected headline inflation of 3.1% and core CPI of 3%.
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The surprise marked a sharp break from recent data showing inflation proving stubborn, especially in services. It also arrived under unusual circumstances. The November report was released eight days late due to the U.S. government shutdown, and October’s CPI data was never published at all. That forced the BLS to rely on methodological assumptions to bridge the gap — assumptions that were neither fully explained nor clearly disclosed.
That opacity immediately set off alarm bells among economists.
“The downside surprise reflects weakness in both goods and services, but may be partly due to methodological issues,” said Michael Gapen, chief U.S. economist at Morgan Stanley.
He described the reading as “noisy” and cautioned that the data may not offer a reliable signal about the underlying inflation trend.
Gapen suggested the BLS may have carried forward prices in some categories, effectively assuming zero inflation during the missing period. If that is the case, he warned, inflation could easily reaccelerate in December once the data normalizes.
At the center of the controversy is a crucial housing component: owners’ equivalent rent, or OER. OER plays an outsized role in CPI, accounting for a significant share of the services basket and heavily influencing the Fed’s inflation outlook.
Alan Detmeister, an economist at UBS, said the October price changes for OER appear to have been “set to zero,” a highly unusual assumption. Evercore ISI’s Krishna Guha went further, saying it looked like the BLS inserted zero inflation across multiple categories when calculating housing inflation for roughly one-third of the cities used in the CPI sample.
“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,” Guha wrote.
The concern is not just academic. If housing inflation was artificially suppressed in November’s data, the distortion could linger for months. Detmeister warned that the weakness would likely reverse sharply next spring, potentially producing unusually large increases in OER and tenants’ rents in the April CPI report released in May.
Until then, he said, price levels for housing components may remain biased downward, complicating the Fed’s effort to gauge whether inflation is genuinely under control.
Housing wasn’t the only source of skepticism. Stephanie Roth of Wolfe Research pointed to the timing of the BLS’s data collection, which occurred later in November than usual. That period coincides with heavy holiday discounting, potentially exerting downward pressure on goods prices.
“The market seems to be taking the data as a dovish signal,” Roth said, “but given the technical quirks we expect the Fed will put less weight on this reading.”
She added that while inflation does not appear to be accelerating due to tariffs or other shocks, a rebound is likely once the data stabilizes following shutdown-related disruptions.
Even before the report was released, some analysts had warned that the shutdown could inject bias into the numbers. Those concerns intensified after the data crossed the wires — and the market reaction began to cool.
By the end of the trading session, stocks had pulled back from their highs. Technology shares carried most of the gains, while more economically sensitive sectors such as banks slipped into negative territory. Treasury yields, which initially fell sharply, also climbed off their lows.
The episode leaves the Federal Reserve in a familiar bind. On the surface, inflation appears to be easing faster than expected, strengthening the case for rate cuts. Beneath that surface, however, the data is clouded by technical distortions that policymakers are unlikely to ignore.
Against this backdrop, the conclusion of some economists is that for now, November’s CPI has delivered relief to markets — but not clarity.