Shutdown Day 22... Concerns Over Prolonged Distortion of CPI and Other Data [Click eStock]

Shutdown Disrupts U.S. Bureau's CPI Data Collection
Potential for Prolonged Distortion in Six-Month Interval Data
"Fed Faces Burden of Estimating Inflation Rather Than Observing It"

Shinhwa Yonhap News

As the U.S. federal government shutdown enters its third week, concerns are rising over the potential decline in the quality of the Consumer Price Index (CPI) data, a key economic indicator. Analysts warn that prolonged distorted data could impact the Federal Reserve's policy decisions.

On the 23rd, Hana Securities expressed concerns about the delayed release of the CPI. While the September CPI, scheduled to be announced on the 24th, is not expected to pose a major obstacle to the Federal Open Market Committee's (FOMC) decision to cut policy rates this month, the company warned that the quality of the October CPI data, due on November 13, could be compromised. This is because the shutdown is directly disrupting the collection of CPI data.

Prolonged Shutdown Disrupts U.S. CPI Data Collection

CPI data is collected through visits and phone calls by Bureau of Labor Statistics (BLS) staff (60%) and alternative data sources (40%). Heo Seongwoo, a researcher at Hana Securities, expressed concern, saying, "The main issue is that the housing cost data, which accounts for the largest portion of the CPI, may suffer from severe errors, and these errors could persist until the first half of next year."

For housing cost data, only rental units, excluding owner-occupied homes, are used as samples. The Bureau of Labor Statistics divides the national rent sample into six panels and collects data on a rotating six-month cycle-April/October, May/November, and so on. This approach is intended to ensure response quality and to capture pure price fluctuations.

If landlords and tenants are asked about rent every month, the refusal rate increases, potentially lowering data quality. By conducting surveys at six-month intervals, the quality of responses can be improved. Additionally, this method allows for accurate identification of pure price changes, rather than errors caused by market volatility.

The housing cost sample that needs to be surveyed in October was last surveyed in April. Due to the shutdown, it is highly likely that the collection of the October sample data was only partially completed. When calculating the rate of change in housing costs, the Bureau of Labor Statistics does not rely solely on the current month's panel but aggregates information from all six panels to calculate the average rate of change.

If there are errors in the October measurement panel data, distorted data will remain in the housing cost figures until April of next year. As a result, the data is expected to be fully normalized only by May of next year. If the shutdown continues through November, the distortion in the housing cost data is likely to worsen.

Data Collected on Six-Month and Bi-Monthly Cycles... Potential for Prolonged Distortion

Moreover, the quality of other data, not just housing costs, could also deteriorate. Some CPI items, such as airline fares and hotels, are collected on a bi-monthly basis. In 20 major metropolitan areas other than New York, Los Angeles, and Chicago, CPI data is also collected every other month. If data collection is missed even once, distorted data may be used for an extended period, increasing errors.

Hana Securities forecasts that the impact of disrupted data collection will persist through the first half of next year. The Federal Reserve faces a "blind spot," unable to accurately gauge inflation trends. Combined with the structural decline in CPI data quality, the Fed is now forced into a dilemma of having to base its policy decisions on estimated, rather than observed, inflation.

However, the balance of monetary policy risks is shifting away from the temporary confusion in indicators like the CPI and toward signs of a slowdown in the real economy. Researcher Heo noted, "Along with the gradual slowdown in the labor market, the contraction of consumption among vulnerable groups is something the Fed cannot overlook. Even amid heightened data uncertainty, the Fed has ample justification to preemptively lower rates to manage downside risks in the real economy."

This content was produced with the assistance of AI translation services.