The November CPI had a number of unusual aspects to it as a result of the unprecedented lapse of a month in data collection due to the government shutdown. To be clear, while the issues I and others have identified all have the effect of lowering the measured rate of inflation, the problems resulted from the inability to collect data, not a deliberate effort to manipulate the CPI.

Rental Inflation Was Understated Due to the Shutdown

At least in part as a result of these issues, the CPI came in considerably lower than most analysts had expected, with the year-over-year rate in the overall CPI at 2.7 percent and the core at 2.6 percent. The year-over-year rate will likely be somewhat higher in both indexes with the December data.

The most notable irregularity was the treatment of October rental inflation. It appears that BLS effectively assumed that rental inflation was zero in October. This lowered the year-over-year measure of inflation in both the rent index and owners’ equivalent rent index by roughly 0.1 percentage points. The effect of this zeroing out of October inflation will be felt in the year-over-year (YOY) inflation measure until April, however the monthly increase should again be more in line with the underlying trends.

Inadequate Data Led the Health Insurance Index to Miss Price Rises in October and November

Another possible source of understatement was due to a limited collection of health insurance data. The health insurance component, which measures only the administrative costs and profits of insurers, fell from showing a 4.2 percent YOY rate of inflation in September to a 0.6 percent YOY rate of inflation in November.

In order for the year-over-year rate to have fallen that sharply, the monthly inflation rate in the health insurance index would have had to average -1.4 percent in October and November. That seems unlikely. We should expect to see a big jump in the health insurance index in the December data.

The Failure to Collect Data in the First Half of the Month Exaggerated the Impact of Holiday Discounts

The third problem is a seasonal adjustment issue. BLS could only collect data for the second half of November, the period just before and after Thanksgiving. Many stores lower prices during this period for holiday sales. The seasonal adjustment for November takes this into account, but it is based on a full month of data, which includes the first half of the month before the sales have started.

This would mean that the seasonal adjustment might have understated the normal impact of holiday sales on prices in November. Insofar as this was a problem, it also will be largely reversed in the December data.

Continued Good News on Food Prices

The food index showed year over year growth of just 1.9 percent in November. This was down sharply from the growth in prior months, implying very little inflation or even price declines in many categories in the months of October and November. The year-over-year increase had been 2.7 percent in the September CPI, before the shutdown.

The lower inflation in dairy products was especially notable, with the year-over-year rate in November at -1.6 percent, compared with a year-over-year increase of 0.7 percent reported for September. Price declines in dairy are not likely to continue into December, but for now prices for milk and other dairy products are likely to remain stable. Eggs prices are still coming down, with prices likely to remain low unless Avian flu picks up. Food prices should show little increase in December.

Gas Prices Will Rise in December

The index for gasoline prices rose 3.0 percent in November, despite falling pump prices, as a result of the seasonal adjustment. Gas prices did not fall as much in November as would ordinarily be the case. Gas prices continued to fall in December, but probably not by as much as the normal seasonal pattern. As a result, the index is likely to show a modest increase.

We are also likely to see a rise in electricity prices, which have risen 6.9 percent year-over-year as of November. We will see continued rapid increase in electricity prices due to both increased demand from AI and supply restrictions resulting from Trump’s measures to limit wind and solar power production.

Inflation in Core Goods Will be Limited

Prices in core goods had been falling consistently for over a year prior to the 2024 election. They began to rise after the election as consumers gobbled up imports in anticipation of tariffs. The year-over-year inflation in this category was 1.4 percent in November. The year-over-year rate is likely to stay roughly the same in December, but we might see larger increases in the new vehicle index, as many manufacturers have delayed passing on tariffs.

The Wildcards: Auto Insurance, Hotels, and Airfares

These three components each have a relatively small weight in the CPI but because they can be highly erratic, they often have a large impact on the monthly inflation rate. The auto insurance index had been rising at double-digit rates but has slowed substantially in the last year. The year-over-year rate was just 3.1 percent in September. BLS did not publish a November figure because it had insufficient data. It is likely that the year-over-year rate with the December data will be somewhat higher than the September pace.

Hotel prices were down 5.7 percent year-over-year in the November CPI. This was clearly an aberration. The year-over-year rate was down just 0.8 percent in the September data. It’s a safe bet that the index will turn around in December. It may not show a year-over-year rise, but it will show a much slower rate of decline.

Similarly, airfares showed a 5.4 percent year-over-year decline in the November data. This will likely be partly reversed with a December increase.

Overall Picture: Moderate Inflation with Some Quirks

The inflation rate for December is likely to be moderate with the overall CPI and core both coming in at 0.3 percent. This should leave the overall index at 2.7 percent and raise the core index to 2.7 percent. Year-over-year inflation in both indexes will be understated by around 0.1 percentage point due to the treatment of the rental indexes for October. This will be reversed with the release of the April data. (The index is effectively an average of the prior six months’ inflation.)