The Impact of Government Shutdown Distortions on CPI Data and Fed Policy

The recent U.S. government shutdown from October 1 to November 12, 2025, has created unprecedented distortions in the Bureau of Labor Statistics' (BLS) Consumer Price Index (CPI) data collection. With October 2025 data entirely halted and November data truncated, the BLS resorted to carry-forward imputation methods, using September 2025 prices to fill gaps. This approach, while necessary under operational constraints, has introduced significant methodological flaws. For instance, shelter costs-nearly a third of the CPI index-were effectively zeroed out in October due to reliance on April 2025 data. Such distortions have rendered the October and November CPI reports unreliable, creating a "partial blind spot" in inflation tracking.

Fed Policy in the Shadow of Data Gaps

The Federal Reserve faces a critical challenge: how to interpret inflation trends when key data points are missing or artificially constructed. The November 2025 CPI report, which showed a core CPI increase of 0.159%, is one of the lowest readings in recent years but is widely regarded as misleading. Analysts predict the Fed will heavily discount this report, instead prioritizing the December CPI data-expected to be released before its January 2026 policy meeting-to inform rate decisions. This delay in actionable data underscores the Fed's reliance on forward-looking indicators and its cautious approach to policy adjustments amid uncertainty.

Historically, markets have become hyper-sensitive to inflation surprises post-pandemic. For example, two-year Treasury yields surged by an average of 0.71 percentage points for each 1 percentage point above expected core CPI readings between 2022 and 2024. This heightened sensitivity suggests that even minor distortions in CPI data could amplify market volatility, compelling the Fed to act preemptively to stabilize expectations.

Navigating Opportunities in Inflation-Linked Assets

Amid this uncertainty, investors are increasingly turning to inflation-linked assets to hedge against potential misreadings of inflation trends. Treasury Inflation-Protected Securities (TIPS) remain a cornerstone of such strategies, as their principal adjusts with inflation. However, the recent CPI distortions may temporarily reduce their immediate appeal, as markets await clearer data.

Beyond TIPS, other assets have historically outperformed during government shutdowns. Gold, for instance, surged 16.7% in 2025 amid heightened policy uncertainty, reflecting its role as a store of value during inflationary and geopolitical turbulence. Similarly, defense stocks have demonstrated resilience, gaining 5.2% during past shutdowns due to their reliance on government contracts and long-term fiscal support.

Defensive sectors like utilities and consumer staples have also attracted attention. During the 2018–2019 shutdown, these sectors outperformed as investors rotated into stable, low-volatility assets. The S&P 500, while initially volatile, has historically rebounded post-shutdown, with 12-month returns averaging over 12%. This pattern suggests that diversified equity exposure, particularly through ETFs or mutual funds, can mitigate short-term risks while capitalizing on broader market recoveries.

Conclusion: Strategic Allocation Amid Uncertainty

The 2025 government shutdown has exposed vulnerabilities in CPI data collection, complicating the Fed's inflation assessment and policy response. For investors, this environment presents opportunities to allocate capital to assets that historically perform well during periods of data distortion and political uncertainty. Gold, defense stocks, and defensive equities offer robust hedges, while TIPS remain a foundational tool for inflation protection. As the Fed navigates this murky landscape, a balanced approach emphasizing liquidity, diversification, and inflation-linked exposure will be critical for preserving capital and capturing upside potential.