Assessing the Reliability of the November CPI Drop and Its Implications for Fed Policy and Equities

The November 2025 Consumer Price Index (CPI) report, released on December 18, 2025, showed a year-over-year increase of 2.7%, below economists' forecasts of 3.1%. While this figure suggests a moderation in inflation, the data's reliability is clouded by methodological distortions stemming from a 43-day federal government shutdown in October 2025 according to BLS analysis. This disruption forced the Bureau of Labor Statistics (BLS) to rely on non-survey data and "carry forward" imputation methods, effectively assuming zero inflation for many categories during October. The resulting report has sparked skepticism among economists and policymakers, raising critical questions about its implications for Federal Reserve decisions and equity market positioning.

Methodological Distortions and Data Reliability

The October 2025 government shutdown halted field data collection for the CPI, leaving the BLS unable to gather price data for the entire month. To address this gap, the agency carried forward September 2025 prices for October, a method that assumes no inflation occurred during the shutdown period. This approach disproportionately affected key components like shelter costs, which account for 44% of core CPI. For instance, owners' equivalent rent (OER) and primary rent indices showed anomalous 0.13% increases over two months, far below historical trends. Additionally, the November data collection period was abbreviated, with field staff beginning work on November 14, limiting the ability to capture full-month price changes.

The distortions are compounded by the report's presentation of two-month changes instead of standard monthly comparisons. Economists warn that this format introduces volatility and reduces confidence in the data, particularly for categories like hotel lodging, where reported annual declines of 4.1% conflict with alternative price indicators. The BLS itself acknowledged these limitations, cautioning that bimonthly CPI volatility should be interpreted with care.

Fed Policy Implications: Caution in the Face of Uncertainty

Federal Reserve officials have responded to the distorted data with a measured approach. New York Fed President John Williams noted that the November CPI was likely skewed downward by about 0.1 percentage points due to the shutdown. Chair Jerome Powell echoed this sentiment, urging a "skeptical eye" when interpreting the numbers. While the core CPI of 2.6% aligns with a disinflationary trend, the Fed has signaled no urgency for further rate cuts, emphasizing the need for more reliable data before adjusting policy.

The central bank's caution is rooted in the risk of overreacting to potentially misleading figures. For example, while energy prices rebounded in November, their volatility is seen as temporary rather than structural. Similarly, the deceleration in shelter costs-a major driver of core CPI-may reflect methodological anomalies rather than genuine economic shifts. The Fed's focus has shifted to labor market stability and financial conditions, with December's CPI data (expected in January 2026) likely to play a pivotal role in determining the next steps.

Equity Market Positioning: Volatility and Sector Rotation

Equity markets have treated the November CPI as a statistical anomaly rather than a clear signal of disinflation. The S&P 500 rose modestly in the report's aftermath, reflecting optimism about the Fed's dovish stance. However, investor behavior has shifted toward a "risk-off" posture, with institutional capital rotating into higher-quality companies and value sectors like Consumer Staples and Utilities. This trend contrasts with the underperformance of AI-driven growth stocks, as concerns over overvaluation and slowing productivity gains persist.

Defensive sectors, including Health Care and Utilities, have outperformed, while Technology and Communication Services have shown late-month momentum. The market's K-shaped recovery-driven by high-income households-has further complicated investor sentiment, with affordability challenges for middle- and low-income consumers weighing on discretionary spending. U.S. Treasuries have also benefited from the uncertainty, with yields declining as investors seek safety.

Conclusion: Navigating Uncertainty in a Data-Scarce Environment

The November 2025 CPI report underscores the fragility of inflation data in the face of institutional disruptions. While the headline figures suggest a cooling trend, methodological distortions and policy uncertainty demand a cautious interpretation. For investors, the key takeaway is the need to prioritize resilience over short-term signals, favoring sectors with strong fundamentals and downside protection. Meanwhile, the Fed's patient approach reflects a recognition that reliable data-particularly for December and beyond-will be critical in guiding policy decisions. As the market awaits clearer signals, the interplay between data quality, central bank caution, and sector-specific dynamics will remain a defining feature of the investment landscape.