Assessing the Impact of Government Shutdowns on Inflation Data and Fed Policy

The 2025 U.S. government shutdown, which lasted from October 1 to November 12, exposed critical vulnerabilities in the collection and reliability of inflation data, particularly for the Bureau of Labor Statistics (BLS). This disruption not only distorted key economic indicators but also forced the Federal Reserve to navigate policy decisions with incomplete and potentially biased data. As 2026 approaches, investors must recognize that the risk of recurring shutdowns-coupled with unresolved structural weaknesses in BLS operations-could further undermine the accuracy of inflation measurements, complicating the Fed's ability to respond effectively.

The 2025 Shutdown: A Blueprint for Data Distortions

The 2025 shutdown suspended most BLS data collection activities, including the Consumer Price Index (CPI) and employment surveys. October 2025 CPI data could not be retroactively collected, leading to a reliance on nonsurvey data or imputations for critical components like shelter costs, which constitute nearly a third of the CPI basket. For example, shelter costs were effectively "zeroed out" in October, creating artificial downward pressure on inflation readings. November 2025 data were further distorted, as prices were compared to October data carried forward from September, obscuring true price movements.

These methodological adjustments introduced significant uncertainty. Economists like Diane Swonk noted that the resulting CPI figures were "wacky," with statistical assumptions exaggerating a perceived slowdown in inflation. The Federal Reserve acknowledged that the lack of October data likely depressed the CPI by about 0.1 percentage points, complicating assessments of underlying inflation trends.

Fed Policy in a Data Vacuum

The Federal Reserve's response to the 2025 data crisis highlights the challenges of policymaking under uncertainty. Despite the distorted data, the Fed opted to delay rate cuts, emphasizing the need for more reliable information from the December CPI report. This cautious approach aligns with historical patterns: during prior shutdowns, the Fed has generally maintained its policy trajectory despite data gaps. However, the 2025 episode revealed a shift in tone, with officials like Raphael Bostic of the Atlanta Fed stressing the importance of restoring price stability while acknowledging the risks of overreliance on compromised data.

The Fed's December 2025 decision to cut rates by 0.25% reflected a broader strategy of balancing inflation control with labor market concerns. Yet, the reliance on non-official data-such as private sector alternatives-underscored the limitations of existing tools. Private firms like ADP and Zillow, while useful for certain metrics, lack the comprehensiveness and transparency of official BLS data, particularly for services inflation, which accounts for 64% of the CPI.

The graph highlights sharp declines and artificial spikes in key inflation metrics due to missing data and methodological adjustments. A yellow arrow points to a section labeled “Shelter Cost Anomalies,” emphasizing the impact of zeroed-out values. The background features muted tones of gray and brown to reflect the uncertainty and instability introduced by the shutdown.

2026 Risks: Political Gridlock and BLS Vulnerabilities
The risk of another government shutdown in 2026 remains high due to political gridlock and fiscal tensions. J.P. Morgan analysts estimate that a repeat shutdown could reduce Q4 2025 GDP growth by 0.25 percentage points and create a one-percentage-point drag on Q1 2026 growth as delayed activities are resolved. The Congressional Budget Office (CBO) has warned that prolonged shutdowns could exacerbate economic volatility, particularly if they disrupt critical data releases like the CPI and employment reports.

Compounding these risks is the BLS's structural fragility. Despite the 2025 crisis, the agency has not implemented significant reforms to improve data reliability. Funding cuts-22% in real terms since 2010-have already led to proposals to reduce the Current Population Survey (CPS) sample size by 5,000 households, threatening the accuracy of subpopulation data. Additionally, staffing shortages and declining survey response rates further strain the BLS's capacity to maintain data quality.

Investor Implications: A Call for Caution

For investors, the 2025 experience serves as a cautionary tale. In 2026, inflation readings may continue to reflect methodological artifacts rather than true economic conditions. For instance, the BLS is already studying how the 2025 data gaps might distort six-month rent and owners' equivalent rent calculations in April 2026, potentially leading to artificial rebounds in shelter inflation.

Moreover, the Fed's reliance on imprecise data could delay or accelerate policy actions, creating market volatility. The December 2025 rate cut, for example, was partly justified by the need to address "spotty" data, yet the Fed's cautious stance left markets guessing about future moves. Investors should therefore treat inflation reports with skepticism, particularly those derived from extended data collection periods or nonsurvey imputations.

Conclusion

The 2025 government shutdown exposed systemic weaknesses in the U.S. economic data infrastructure, with the BLS and Fed struggling to adapt. As 2026 unfolds, political risks and unresolved BLS challenges threaten to perpetuate data distortions, complicating inflation tracking and policy decisions. Investors must approach inflation readings with a critical eye, recognizing that official figures may not fully reflect underlying economic realities. Diversifying data sources and maintaining a buffer for policy uncertainty will be essential strategies in navigating the volatile landscape ahead.