According to the Bureau of Labor Statistics, the Fed’s preferred inflation gauge (consumer price index) rose at a 2.7% annual pace, well under the 3.1% economists expected.
The core CPI number came in softer too, rising 2.6% over the past year instead of the 3% forecast. That measure excludes food and energy, and it usually gets more attention because it moves less. Traders liked the surprise, even though the report came with missing data thanks to the mess caused by the government shutdown.
“A tame CPI will reinforce the Fed is focused on protecting the employment market. And that means a Fed ‘put’ is now in place for the economy,” Tom Lee, head of research at Fundstrat, said. “In other words, if the Fed is concerned about downside risks to the economy, the Fed ‘put’ comes into play and this would be for stocks to rise.”
Showing how the shutdown changed the release
This was the first CPI update that covered the period when the U.S. government was shut down. The stoppage made normal data collection harder, and that chaos forced the October CPI release to be canceled.
That update was supposed to come out on December 10, but the agency said it could not collect the numbers after the fact. The BLS explained that it used “nonsurvey data sources” to fill some gaps, which is not typical for a monthly CPI release.
Because the October information never came together, this month’s report did not include all the usual data points. Economists warned that the missing comparison month may make them slow to call this the start of a long drop in inflation.
Fed Chair Jerome Powell said last week the CPI data “may be distorted” because of the record-long government shutdown that ended on November 12.
The Fed cut its benchmark rate by 25 basis points earlier this month, the third straight reduction. Even with the softer CPI, the odds of a January rate cut stayed low. The market, however, increased the chances of a March cut. The CME Group’s FedWatch tool moved the probability to 60%, up from 53.9% the day before.
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