Behind the Numbers: PCE Inflation Update, June 2010
This update, prepared by Dallas Fed Senior Economist Jim Dolmas, provides an in-depth analysis of the latest personal consumption expenditures (PCE) inflation data. Updates will be posted monthly, following the release of the official PCE data by the Bureau of Economic Analysis. NOTE: Terms in bold are defined in the Inflation Update Glossary.
For a third consecutive month, falling energy prices were the prime culprit in producing a negative headline PCE inflation rate—abetted this time around by declines in the price index for food. That string of consecutive negative headline rates looks to be snapped, however, when data for July come out. Meanwhile, the 12-month inflation rate for core PCE ticked down a notch, from 1.5 percent in May to 1.4 percent in June. The 12-month trimmed mean PCE inflation rate held steady at 1 percent.
The data for June incorporated the results of the Bureau of Economic Analysis’ (BEA) annual revision to the National Income and Product Accounts (the NIPAs). If you’re concerned about core inflation possibly becoming too low, the revision contained both good news and bad. On the bad side, the revision erased the tentative signs of stabilization we saw in the May data. Rather than leveling off, 12-month core PCE inflation now drifts downward in each of the past three months. On the good side, the revision raised the level of 12-month core PCE inflation, by about 0.2 percentage points, so the core rate is drifting down from a higher level.
The revision had a smaller impact on 12-month trimmed mean PCE inflation, raising it by just a 10th of a percentage point.
Energy and Food Prices Weigh on Headline Index
Headline PCE posted a 1.7 percent annualized rate of decline in June. This comes on the heels of declines in April and May and brings the 12-month headline rate down to 1.4 percent. Back in March, the 12-month headline rate stood at 2.5 percent.
As was the case in May, a sharp drop in the price of gasoline—by 4.1 percent at a monthly rate or nearly 40 percent annualized—accounted for most of the decline. Gasoline should swing from a negative to a positive contributor in July, based on Department of Energy weekly data on retail gasoline prices. We now have complete data for July, and they show a slight 0.1 percent decline in the average retail price of gasoline compared with June (monthly rate). Since the typical seasonal effect for July is a much bigger 4.5 percent decline, we should see a nearly 4.5 percent increase in the seasonally adjusted data that will go into the July PCE release. Barring big declines in other PCE components, that should be enough to produce a positive headline rate.
Food prices, which declined only negligibly in May, fell at a more noticeable 2.3 percent annualized rate in June. The decline was fairly uniform across the more-processed (–2.4 percent) and less-processed (–1.9 percent) ends of the spectrum. On a 12-month basis, the price index for food is up a scant 0.2 percent, reflecting a decline of 0.4 percent for prices of more-processed items and an increase of 1.7 percent for the prices of less-processed items.
Core PCE Inflation Slows Further
The core PCE price index was close to unchanged in June, up just 0.5 percent at an annualized rate. As a result, six-month and 12-month core rates declined, with the six-month rate falling from an annualized 1.3 percent to 1.1 percent, and the 12-month rate inching down from 1.5 percent to 1.4 percent. Both of those longer-horizon rates had ticked up in the prerevision data for May.
The inflation rates for core goods and core services were remarkably similar in June—both were up negligibly, with core goods prices up an annualized 0.4 percent and core services prices up an annualized 0.5 percent. For the 12 months ending in June, core goods prices are down 0.4 percent and core services prices are up 2 percent.
That configuration of 12-month rates tells us, in a nutshell, why core PCE inflation is so low now relative to our experience over the past 15 or so years. The –0.4 percent rate for core goods is not strange—in fact, that’s exactly the average annualized rate of core goods inflation since 1994. Core services inflation over that span, though, has been closer to 3 percent.
Big-Impact Items in June
The 0.5 percent annualized rate of increase in core services prices in the month of June is quite low—one needs to go back to the period from late 2008 to early 2009 to find comparable one-month rates. However, June’s very low rate of core services inflation owes a lot to a few items of questionable value as signals of underlying inflation trends—airline services, down about 37 percent at an annualized rate, and three components of financial services, down collectively about 8 percent. The price of airline services is historically highly volatile and often tied closely to energy prices. Prices for the three financial service items are also volatile, and two of those are “imputations”—that is, inferred costs of services for which no explicit prices are charged. (Many of the financial services we use don’t carry explicit fees, but we pay for them nonetheless in forgone interest. Imputation attempts to put a price tag on those sorts of services.)
At the other end of the spectrum, men’s and boys’ clothing, tobacco, and hotels and motels—items all known for their volatility —together with some medical care services made significant positive contributions to June’s core rate.
Rent and Owners’ Equivalent Rent
A big anchor in core services, though, remains shelter costs because of their size in expenditure and their unusually low rates of increase (at least compared with historical experience). Rent and owners' equivalent rent (OER) compose about 15 percent of overall PCE, which is about half their weight in the Consumer Price Index but still very large. Both have been running at historically low levels: On a 12-month basis, “rent of tenant-occupied stationary homes” (or just plain “rent”) is essentially unchanged (–0.04 percent), and OER is down a quarter of a percent. The two items together combine to reduce the 12-month core rate by 0.2 percentage points, in the precise sense that excluding those items from the core would raise the 12-month core rate by 0.2 percentage points.
On the plus side, the firming in each that we noted in May’s update continues—rent has posted its fourth consecutive monthly increase and OER its second.
The Trimmed Mean
The trimmed mean posted a 0.8 percent annualized rate of growth in June, slightly higher than the core rate but not all that different. On the other hand, though, 0.8 is identical to May’s number and slightly above the annualized one-month rates the trimmed mean registered from February through April. The pitch of the trimmed mean is lower than that of the core, but it’s playing a somewhat steadier tune.
Consequently, its six- and 12-month rates for June held steady at their May values—annualized 0.7 percent for six months and 1.0 percent for 12 months.
As noted above, the BEA’s annual revision had less impact on the trimmed mean. The six- and 12-month rates in May, prerevision, were 0.7 percent and 0.9 percent.
Still a Large Number of Falling-Price Components
Of the 178 PCE components that, potentially, go into constructing the trimmed mean, 73 (or 41 percent) fell in price. Since December 2008, the number of falling-price components has been persistently high, averaging about 70 components. By contrast, during 2003, the last time core PCE inflation was as low as it is now, the average was 61 components.
Finally, About That Revision…
Once a year, the BEA makes a major revision of the data that goes into the NIPAs. These revisions—which can affect several years’ worth of past numbers—incorporate better source data and, sometimes, methodological improvements. The revisions impact headline and core PCE (as well as GDP and all of its components). Because the BEA revises the data used to construct the trimmed mean, the annual revisions can affect the trimmed mean as well.
Typically, most of the impact of the revisions on top-line numbers like headline and core PCE represents the net effect of many small changes to many different pieces of component-level data—prices and quantities for all the items that go into the index. A few items invariably stand out, though, as having outsized impacts.
This time around, one item accounts for about a third of the difference between the old and revised 12-month core inflation rates—the price index for financial services provided by “other depository institutions and regulated investment companies,” which are basically financial service providers apart from commercial banks. For the 12 months ending in May, the price index for that component was originally estimated to have increased by just 1 percent. In the revised data, that 12-month increase is now 5.6 percent.
This is also a component with very volatile month-to-month price changes, so it’s often excluded from the trimmed mean. That explains, in part, why the trimmed mean was less affected by the revision—if an item isn’t being included very often, revisions to it aren’t going to matter much for the trimmed mean.
August 4, 2010