US Inflation May Be Running Hotter Than Official Data Suggest, Moody’s Analytics Warns

Mark Zandi of Moody’s Analytics has raised concerns that official US consumer price index (CPI) data significantly understate the true level of inflation. According to Zandi, recent figures released by the Bureau of Labor Statistics (BLS), which showed headline inflation slowing to 2.7% year-on-year in November, do not accurately reflect current price pressures.

Using an alternative methodology, Moody’s Analytics estimates that inflation remained steady at around 3.0% in November, rather than declining as official data suggest. Zandi highlights several issues that contribute to this disparity.

A primary factor is the impact of the US government shutdown in October, which prevented the BLS from conducting its usual comprehensive price survey. Instead, the BLS assumed prices for most goods and services remained unchanged during this period — an assumption that Zandi regards as unrealistic. To correct for this, Moody’s Analytics replaced these assumptions with private-sector price data where available and used forecasts where necessary to reconstruct a more accurate picture of October inflation.

Additionally, Zandi points to distortions in November’s CPI data caused by delayed survey collection. Price movements in November are particularly sensitive to timing, as prices typically rise earlier in the month before discounts increase during the lead-up to the holiday shopping season. Adjusting for this timing bias, Moody’s estimates core CPI inflation closer to 3.0% year-on-year, higher than the official reading.

Beyond these timing and survey challenges, Zandi warns of structural weaknesses in the BLS’s inflation measurement process. Budget cuts and staff shortages have led to a rising reliance on imputed prices, with nearly one-third of CPI components now being estimated rather than directly observed—an increase from about one-tenth earlier in the year.

This growing use of imputed data, according to Zandi, is causing “noise” to increasingly drown out the true inflation “signal.” When stripping away this noise, he argues that inflation remains uncomfortably high and continues to exceed the Federal Reserve’s 2% target, with little sign of sustained disinflation.

For forex traders, these insights are important as they suggest inflationary pressures in the US economy may be stronger than official measures indicate. This could influence Federal Reserve policy decisions and result in market volatility, particularly in currency pairs sensitive to US interest rate expectations.

Original Source: Eamonn Sheridan of investinglive.com