Eroding Reliability in U.S. Inflation Data: Implications for Central Bank Policy and Markets

The reliability of U.S. inflation data has come under increasing scrutiny as government shutdowns disrupt the collection and release of critical economic indicators like the Consumer Price Index (CPI). The 43-day shutdown in 2025, the longest in U.S. history, exemplifies this crisis, with the Bureau of Labor Statistics (BLS) unable to collect October CPI data and delaying the November report by eight days. This "data fog" has distorted market expectations, forced central banks into cautious policy stances, and compelled investors to recalibrate strategies in an environment of heightened uncertainty.

Historical Precedents and Systemic Risks

Government shutdowns have historically disrupted CPI reporting, with the 2018–2019 shutdown canceling the October CPI report and creating a 35-day gap in data availability according to TCW analysis. During this period, the Federal Reserve faced a "data-dependent" dilemma, relying on imputed data and alternative proxies like private-sector inflation trackers to gauge inflation trends. The Congressional Budget Office estimated that such shutdowns reduce quarterly GDP growth by approximately 1.5 percentage points, with a portion of economic activity permanently lost. For example, the 2018–2019 shutdown shaved 0.2% off Q1 2019 GDP.

The 2025 shutdown exacerbated these issues. The BLS could not retroactively collect October CPI data, and November's report relied on September data for October comparisons, introducing systematic biases. Core inflation (excluding food and energy) rose 2.6% year-over-year, but analysts warned this figure likely reflected distortions from the truncated data-gathering process. Fed Chair Jerome Powell acknowledged the need for a "skeptical eye" in interpreting the data, emphasizing reliance on December's CPI report for policy decisions.

Central Bank Policy Adjustments: Caution Amid Uncertainty

The Federal Reserve's response to distorted CPI data has been marked by caution and division. During the 2025 shutdown, the FOMC faced a split: some officials advocated for rate cuts to address slowing growth, while others urged restraint due to insufficient evidence of disinflation. This mirrors historical patterns, such as the 2018–2019 shutdown, when the Fed delayed rate cuts until data clarity improved.

The reliance on alternative data sources has further complicated policy-making. For instance, the November 2025 CPI report used 40% imputed data due to incomplete survey responses. While the Fed has historically used broader indicators like the PCE index to supplement CPI, the lack of real-time data during shutdowns forces policymakers to rely on lagging or less granular metrics. This uncertainty has also impacted inflation-linked securities, such as Treasury Inflation-Protected Securities (TIPS), where market pricing diverged from official data due to gaps in CPI reporting.

Market Reactions and Investment Strategy Recalibrations

Markets have historically shown resilience to shutdowns, though short-term volatility is common. The S&P 500 typically gains during shutdowns, averaging a 4.7% return since 2010. However, the 2018–2019 shutdown saw a 15% initial decline before a 31% rebound, underscoring the role of investor sentiment and sector-specific vulnerabilities. During the 2025 shutdown, consumer sentiment plummeted to near-record lows, while long-term inflation expectations fell from 3.9% to 3.6%.

Investors have adapted by emphasizing diversification and hedging. Institutional investors increasingly rely on high-frequency data (e.g., credit card spending, mobility metrics) and private-sector inflation trackers, though these lack the comprehensiveness of official reports. Defensive assets like gold and U.S. Treasuries have gained traction during shutdowns, reflecting a flight to safety. Meanwhile, sectors tied to government contracts face heightened risk, while large-cap tech stocks, less sensitive to fiscal policy, have shown relative resilience.

The Case for Recalibrating Investment Approaches

The growing frequency of data disruptions necessitates a reevaluation of investment strategies. First, investors must prioritize diversification across asset classes and geographies to mitigate sector-specific risks. Second, incorporating alternative data sources-while acknowledging their limitations-can provide real-time insights during data gaps. Third, long-term fundamentals should anchor decision-making, as markets often recover post-shutdown.

Central banks, too, must adapt. The Fed's reliance on forward-looking indicators and alternative metrics during the 2025 shutdown highlights the need for robust contingency plans. However, the lack of a unified framework for handling data gaps remains a vulnerability.

Conclusion

The erosion of CPI data reliability during government shutdowns poses systemic risks to both central bank policy and market stability. While historical precedents suggest markets can recover, the increasing complexity of economic data gaps demands proactive recalibration of investment strategies. Investors and policymakers alike must prepare for a future where data disruptions are not anomalies but recurring challenges.