The Federal Reserve Continues to Navigate the 'Data Fog' Caused by the Shutdown

Main Insights

• The economic impact of the government shutdown in October and November continues, as significant federal reports remain postponed or altered.

• The Personal Consumption Expenditures (PCE) index, a critical monthly measure of inflation, will lag by a month until April, while other statistics have been distorted due to missed surveys during the shutdown period.

• Economists warn that the absence of current inflation figures may cause the Federal Reserve to hesitate before making any changes to interest rates in the near future.

Although the 43-day government shutdown may seem like a distant memory, its effects are still being felt in the realm of economic data. The shutdown, which stretched across October and into November, has led to both delays and inaccuracies in official inflation reports. This ongoing disruption is making it more challenging for Federal Reserve officials to determine the appropriate course for monetary policy.

The latest Personal Consumption Expenditures inflation report, which would typically reflect December's data, instead only included October and November figures, as the Bureau of Economic Analysis works to catch up. Regular monthly PCE updates are not expected to resume until April.

The Consumer Price Index (CPI), another key inflation indicator, was also disrupted. The Bureau of Labor Statistics was unable to collect October data at all, and November's data collection was delayed, possibly causing holiday sales to skew the results, according to some economists.

Economic Implications

The absence of timely data makes it difficult to accurately assess inflation, increasing the risk that both investors and policymakers may be surprised when the government eventually releases updated figures.

Because of these reporting delays and potential inaccuracies, it is widely anticipated that the Federal Reserve will keep interest rates unchanged at their next meeting, rather than reducing them for a fourth consecutive time.

Policymakers face a dilemma between maintaining higher rates to combat inflation and lowering them to support a weakening job market. The Federal Reserve depends on reliable economic data to balance its dual objectives of price stability and maximum employment. As a result, officials may delay any major decisions until more accurate data becomes available.

Brett Ryan, a senior economist at Deutsche Bank, noted that Federal Reserve officials will likely want to review several more months of data to better understand the underlying economic trends. The shutdown's effects could linger, especially in how housing costs are measured. The Bureau of Labor Statistics had to estimate changes in rent and homeownership expenses for October, which may continue to influence the data until April, when the agency plans to revisit the homes missed during the shutdown, according to economists at Goldman Sachs led by Jessica Rindels.

Since housing costs make up a significant portion of household spending and inflation calculations, this data gap could be temporarily making inflation appear lower than it actually is, according to Omair Sharif, founder and president of Inflation Insights. Over the past three months, annual "core" inflation seemed to slow, with prices rising 2.6% over the year in December, down from 3% in September, based on the CPI. However, Sharif cautions that this may be misleading.

Sharif suggests that, given the data distortions—especially regarding rent and owners' equivalent rent—core inflation is probably still closer to 3% than the reported 2.5%.

In summary, while the data blackout that frustrated Federal Reserve officials during the shutdown has improved somewhat, it has not been fully resolved. David Seif, chief economist at Nomura, remarked that the unreliable inflation data resulting from the shutdown has likely made it harder for policymakers to discern the true direction of inflation.