Tuesday morning's Consumer Price Index release carries unusual uncertainty—not about what the headline number will be, but about whether it can be trusted. The government shutdown that disrupted price collection for October has created ripple effects that economists say will cloud inflation data well into 2026.

The Data Quality Problem

The issue traces back to the federal government shutdown that prevented Bureau of Labor Statistics field agents from collecting price data for October. When November's CPI was released, showing headline inflation dropping to 2.7% from 3.0% in September, markets reacted cautiously. The core reading of 2.6%—the lowest since March 2021—was particularly suspect.

The problem isn't that the BLS fabricated numbers; it's that missing October data points created gaps in the statistical methodology that tracks price changes over time. Goods prices and rental estimates, in particular, may be artificially suppressed as a result.

"Data distortions linger from the government shutdown, continuing to artificially lower goods and rental prices and skewing December's data. It's not going to be until midyear that we start to really get a cleaner read."

— Bernard Yaros, Lead US Economist at Oxford Economics

What Economists Expect

Consensus forecasts anticipate headline CPI at 0.3% month-over-month and 2.7% year-over-year, with core CPI matching those figures. These would suggest inflation remains stable but above the Federal Reserve's 2% target.

However, some economists are warning that headline numbers could come in higher. Oxford Economics' Yaros forecasts headline inflation at 0.4% month-over-month, above consensus, as the data quality issues create unusually wide uncertainty bands around the estimate.

The Cleveland Fed's nowcast model, which uses alternative data sources to estimate inflation in real-time, points to somewhat milder readings—approximately 0.20% for headline and 0.22% for core. This divergence between traditional surveys and alternative approaches highlights the unusual uncertainty.

Why It Matters for the Fed

The Federal Reserve faces an awkward position: its policy decisions depend on data that may not accurately reflect economic reality. Following three rate cuts in 2025, the Fed is widely expected to hold steady at its January meeting, with roughly 95% of futures market participants pricing no change.

But if December's data is distorted—whether artificially low or high—the Fed's subsequent decisions could be based on a misleading picture. Chair Jerome Powell has emphasized the Fed's data-dependent approach, yet the data itself has become less dependable.

The policy implications extend beyond January. If inflation appears to be running hotter than the distorted data suggests, the Fed may need to maintain restrictive policy longer than markets expect. If the distortions are artificially elevating readings, the Fed could be slower to cut rates than warranted.

Tariff Complications

Adding to the complexity, economists expect tariff-related price pressures to become visible in early 2026 data. Gregory Daco, chief US economist at EY-Parthenon, notes: "We are going to see inflation continue to move slightly higher in early 2026, but we're not going to see a surge."

This creates a challenging interpretive problem: distinguishing between temporary data distortions from the shutdown, genuine underlying inflation trends, and new tariff-driven price increases. Each has different policy implications, but all may appear in the same headline numbers.

What to Watch Tuesday

When the BLS releases the December CPI at 8:30 a.m. ET, several elements deserve close attention:

  • Shelter costs: Housing inflation has been the stickiest component, but shutdown effects may distort the owners' equivalent rent calculation
  • Core goods: Prices for physical goods have been deflating, but data collection gaps may exaggerate this trend
  • Services ex-shelter: This component is less affected by shutdown distortions and may provide a cleaner signal
  • Revisions: Watch for any revisions to prior months as the BLS incorporates missing data

The Market Reaction

Markets will likely react to Tuesday's number at face value, with higher readings pressuring stocks and lower readings providing relief. But sophisticated investors should maintain awareness of the data quality caveats.

The bond market may prove more interesting than equities. Treasury yields have climbed recently on concerns about persistent inflation and fiscal sustainability. A hot CPI print could push the 10-year yield toward 4.25%, while a cool reading might offer temporary relief.

When Will Data Normalize?

The BLS has announced publication changes to be implemented on February 11, 2026, which may address some methodology concerns. But economists expect data quality issues to persist through midyear as the statistical smoothing catches up to the October gap.

For now, the investment community faces an uncomfortable reality: one of the most important economic indicators that drives Fed policy and market sentiment is less reliable than usual. Until the distortions wash out, inflation data will require more interpretation and less mechanical reaction than normal.

Tuesday's CPI report will generate headlines and move markets. But the wisest response may be to treat the numbers with more skepticism than usual—and to wait for cleaner data before drawing firm conclusions about inflation's trajectory.