Assessing the Fed's Next Move: November CPI and the Path to Rate Cuts in 2026

The November 2025 Consumer Price Index (CPI) report, which showed annual inflation slowing to 2.7%, has become a focal point for investors and policymakers alike. However, the data's reliability is clouded by methodological distortions stemming from a prolonged federal government shutdown. These distortions, particularly in housing-related components like owners' equivalent rent (OER) and tenants' rent, have raised serious questions about the accuracy of inflation trends and the Federal Reserve's ability to calibrate its policy response.

Methodological Distortions and Their Impact

The October 2025 CPI data was entirely uncollected due to the shutdown, forcing the Bureau of Labor Statistics (BLS) to carry forward September price levels for critical categories, including shelter. This approach effectively assumed zero inflation for October, a method economists have criticized as "mechanically flawed" and "totally inexcusable". Shelter costs, which constitute roughly one-third of the CPI basket, were artificially suppressed, potentially understating true inflation trends. Similarly, anomalies in food at home and services inflation-categories that deviate from observed market dynamics-further erode confidence in the data.

The BLS acknowledged these limitations but provided no detailed guidance for interpreting the anomalies according to analysts. As a result, the November CPI report risks misleading policymakers and investors. Analysts warn that future CPI figures, particularly in April 2026 when data normalizes, could show artificial rebounds as the methodological distortions unwind. This creates a volatile backdrop for assessing underlying inflationary pressures.

The Fed's December 2025 decision to cut interest rates by 25 basis points-its third reduction of the year-reflects a delicate balancing act. While the FOMC cited a cooling labor market and rising unemployment as key drivers, it also explicitly acknowledged the distortions in the November CPI data. Fed Chair Jerome Powell advised viewing the report through a "skeptical eye," emphasizing the need to focus on broader economic indicators.

The Fed's December statement noted that inflation remains "somewhat elevated" and that uncertainty about the economic outlook is "high" according to official documentation. This cautious stance underscores the central bank's reluctance to overreact to potentially misleading data. For instance, the sharp decline in food at home inflation and services inflation-categories that often lag behind real-time price changes-has not been independently corroborated by market trends. The Fed's reliance on alternative measures, such as the Personal Consumption Expenditures (PCE) index, suggests a desire to mitigate the CPI's methodological shortcomings.

Implications for 2026 Rate Cuts

Goldman Sachs Research projects that the Fed will likely slow the pace of rate cuts in early 2026, with potential reductions in March and June bringing the target funds rate to between 3% and 3.25%. However, this timeline hinges on two critical factors: the normalization of CPI data and the Fed's confidence in its inflation outlook. If the artificial rebounds in April 2026 CPI figures create the illusion of sustained disinflation, the Fed may accelerate cuts. Conversely, if underlying inflation proves stickier than distorted data suggests, policymakers could delay further easing.

The December 2025 FOMC meeting also highlighted the Fed's growing concern over President Trump's tariffs, which have contributed to inflation overshoots and added uncertainty to the economic outlook. This complicates the Fed's dual mandate of balancing employment and price stability. A weaker labor market-evidenced by a rising unemployment rate of 4.6%-could force the Fed to prioritize rate cuts even amid data ambiguity.

Conclusion: Navigating a Fragile Data Landscape

The November 2025 CPI report serves as a cautionary tale about the fragility of economic data in times of institutional disruption. For investors, the key takeaway is that the Fed's policy decisions in 2026 will be shaped as much by the credibility of incoming data as by its level. The central bank's emphasis on broader economic indicators and its acknowledgment of CPI distortions suggest a measured approach to rate cuts. However, the risk of artificial rebounds in 2026 CPI figures-and the potential for misaligned market expectations-means that volatility in financial markets is likely to persist.

As the Fed navigates this uncertain terrain, investors should remain vigilant. The path to rate cuts in 2026 will not be linear; it will be defined by the Fed's ability to discern true inflation trends from methodological noise.