Economists warn of flaws in US inflation report

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Wall Street economists have warned that November’s US inflation report, which showed a sharp decline in price growth, was flawed because of missing data in the wake of the recent government shutdown.

US consumer prices rose 2.7 per cent in November from the same period the previous year, according to official data from the Bureau of Labor Statistics. The figure was well below expectations in a Bloomberg poll of 3.1 per cent and September’s rise of 3 per cent.

Core inflation, which strips out volatile food and energy prices, was 2.6 per cent, compared with expectations of 3 per cent.

The report comes after the recent government shutdown halted data collection for a six-week period, forcing the BLS to scrap its October release and estimate many prices rather than using observed data from surveys.

“You’ve got to take it with a grain of salt,” said Diane Swonk, chief economist at KPMG US.

She added: “Things that should be going up are going down and things that should be going down are going up. So it’s confusing and it doesn’t quite square with prices that we’ve observed.”

Inflation had remained stubbornly elevated in recent months, providing a political issue for President Donald Trump as voters grow frustrated with a worsening cost-of-living crunch. 

The White House was quick to seize on Thursday’s release as evidence that Trump’s policies were helping to curb inflation. “I’m not saying that we are going to declare victory yet on the price problem, but this is just an astonishingly good CPI report,” said Kevin Hassett, director of the National Economic Council and a frontrunner to be next chair of the Federal Reserve.

The bond market largely shrugged off the inflation report. Yields on short-term government debt briefly tumbled to a two-month low as prices rose, before soon retracing about half of that move.

Wall Street’s S&P 500 share index closed 0.8 per cent higher on Thursday and the Nasdaq Composite climbed 1.4 per cent — in a fresh bout of volatility for equities.

“Markets don’t care [about the data] because the data doesn’t pass the smell test,” said Jon Hill, head of US inflation strategy at Barclays.

“Given the lack of explanation about how the BLS made these decisions, it’s hard to take at face value. Because it was such a big miss, and because it’s so hard for the market to take the data literally, investors don’t want to bet the house.”

Analysts said the government shutdown distorted the figures. The BLS likely zeroed out some inflation readings for the period when it was unable to collect data, notably in housing costs, which accounts for a third of the headline figure. Black Friday discount deals in late November when surveys restarted may have also skewed readings lower.

Michael Hanson, a senior economist at Wall Street bank JPMorgan, said the lower than expected figures “suggest that the BLS may have held fixed a number of prices it was not able to collect in October, which likely means a material downward bias in the current numbers that will be reversed in coming months as full price collection resumes”.

The BLS noted on Thursday that “for a few indexes, BLS uses nonsurvey data sources instead of survey data to make the index calculations”.

Thursday’s report could spur further calls from the president for the Fed to cut rates more quickly. Trump has repeatedly lashed out at current chair Jay Powell over the pace of cuts, calling him a “moron”.

But analysts were circumspect as to how much the data would affect the central bank’s approach to monetary policy.

The Fed voted last week to reduce borrowing costs to a three-year low following a divisive meeting in which policymakers debated whether to prioritise risks to inflation or the labour market.

Some members of the rate-setting Federal Open Market Committee have warned that cutting rates too quickly risks exacerbating inflation, while others argue reductions are necessary to support a weak labour market. 

Separate data released by the BLS this week showed the US unemployment rate ticked up to a four-year high in November. The Fed also targets a different inflation rate, known as personal consumption expenditures, which could provide a clearer read when it is released.