The Distorted December CPI and Its Implications for 2026 Inflation Trends

The December 2025 Consumer Price Index (CPI) report, released amid the lingering effects of a prolonged U.S. government shutdown, has sparked widespread skepticism among economists and investors. The shutdown, which spanned from October 1 to November 12, 2025, disrupted the Bureau of Labor Statistics' (BLS) data collection processes, forcing the agency to rely on flawed methodologies to fill gaps in the October data. These methodological shortcuts-particularly the use of "carry-forward" imputation-have introduced significant distortions into the CPI, creating a distorted view of inflation trends. For investors, this raises critical questions about the reliability of near-term data and the need to recalibrate portfolio strategies to account for a more accurate inflation trajectory in 2026.

Methodological Distortions: Carry-Forward and Its Consequences

The BLS's reliance on carry-forward imputation for October 2025 data-a method that assumes no price changes for certain sectors-has skewed inflation readings. According to a report by the BLS itself, this approach was necessitated by the shutdown's disruption of fieldwork, which left October data largely uncollected. For example, rent and owners' equivalent rent (OER) data for October were carried forward from April 2025, effectively zeroing out price changes for shelter costs during a critical period. This created a downward bias in October and November inflation readings, while December figures were artificially inflated due to the abrupt normalization of data collection in late November.

The implications are profound. As stated by the National Association of Business Economics (NABE), the distortions "undermine the utility of CPI as a real-time indicator," with analysts warning that the reported cooling in November inflation may not reflect actual market conditions. The BLS's own admission that "alternative methods introduced potential distortions" underscores the fragility of the data.

Sector-Specific Distortions: Where the Data Fails

The distortions are not evenly distributed across sectors. Housing, which accounts for over 40% of core CPI, was particularly affected. With rent and OER data carried forward from April, the October 2025 report showed no price changes for shelter costs, despite ongoing market pressures. This anomaly is expected to reverse in April 2026, when updated rent data will likely show a sharp upward correction, creating a misleading spike in inflation.

Other sectors also faced challenges. Core goods prices, for instance, rose by 0.34% over the October–December period, but this figure is likely understated due to limited data collection during November's Black Friday sales. Services inflation, meanwhile, showed unexpected declines, which economists attribute in part to methodological flaws. Energy and food sectors, which rely on administrative data rather than surveys, were less affected but still face uncertainty due to the truncated data-gathering window.

Recalibrating for 2026: A Sector-Specific Approach

Given these distortions, investors must adopt a forward-looking, sector-specific strategy to navigate 2026 inflation risks. Three key considerations emerge:

1. Housing as a Wild Card: The April 2026 rent data normalization is likely to trigger a sharp upward revision in shelter costs, potentially inflating core CPI by 0.5–1.0 percentage points. Investors should hedge against this risk by underweighting sectors sensitive to interest rate volatility (e.g., long-duration bonds) and overweighting defensive assets like short-duration treasuries or inflation-linked securities.

2. Services Sector Volatility: The distortions in services inflation-driven by carry-forward assumptions-suggest that near-term readings may not reflect true demand. A sector-specific approach could involve monitoring alternative indicators, such as private-sector price indices or real-time spending data, to identify genuine trends.

3. Goods and Energy Caution: While goods and energy data are less distorted, the December 2025 report's reliance on partial November data introduces uncertainty. Investors should remain cautious about overreacting to short-term fluctuations and instead focus on structural trends, such as supply chain resilience or energy transition costs.

Conclusion: Beyond the Data Fog

The December 2025 CPI report serves as a cautionary tale about the fragility of official inflation metrics during periods of institutional disruption. While the BLS has acknowledged the limitations of its methods, the distortions will persist until data normalizes in mid-2026. For investors, the path forward lies in moving beyond the "foggy" CPI numbers and adopting a more nuanced, sector-specific approach. By anticipating corrections in key areas like housing and leveraging alternative data sources, portfolios can be better positioned to navigate the inflationary landscape of 2026.