Behind the Numbers: PCE Inflation Update, August 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.
The headline PCE price index increased at a 2.8 percent annualized rate in August. This comes on the heels of a 2.7 percent annualized rate for July. As in July, a sharp increase in the price index for gasoline accounted for much of the strength in the August headline number. The 12-month headline rate held steady at 1.5 percent.
The core PCE price index increased at a 1.4 percent annualized rate in August, up from a 1.1 percent annualized rate in July. Over those two months, core PCE inflation has averaged an annualized 1.3 percent, a noticeable uptick from the 0.8 percent average rate recorded over April, May and June. The 12-month core rate remained at 1.4 percent for a third straight month.
The trimmed mean PCE inflation rate came in at a 1.5 percent annualized rate in August. While still low by historical standards, this is the highest one-month rate we’ve seen since October 2009 and the first reading above an annualized 1 percent since November 2009. The 12-month trimmed mean rate held steady at 1 percent.
The pickup in all three PCE inflation gauges over the past two months is probably a welcome development, given their exceptionally low levels. Two months of data, though, does not make a trend. We can say that our conclusion from last month’s inflation update continues to stand: The underlying trend in inflation appears, for now, to be holding steady, albeit at a very low rate.
Gasoline Again Fuels Headline Gain
Roughly half the 2.8 percent annualized headline inflation rate for August owes to gasoline, in the sense that a price index excluding only gasoline would have posted an inflation rate in August of about 1.4 percent. Seasonally adjusted, the price index for gasoline rose 3.9 percent in August at a monthly rate. That translates into an annualized rate of increase of 59 percent.
Looking ahead, we now have fairly complete data on gasoline prices in September, from the Department of Energy’s weekly survey of average retail gas prices. Those data indicate a decline in price of about 1.3 percent from August to September, before seasonal adjustment. Taking account of the usual seasonal pattern in gasoline prices—which would call for a roughly 2.9 percent decline from August to September—we can expect a seasonally adjusted increase of about 1.6 percent when September’s PCE data come out. While large, that’s less than half the size of the increase we see in the August data.
If the nongasoline components of the PCE post-September numbers close to their August numbers, we can expect the headline PCE inflation rate to come in at about 2 percent annualized when September’s data are released.
Other energy items made only modest contributions to the headline index in August. Fuel oil and natural gas posted fairly large increases, but the weights on these items are much smaller than the weight on gasoline. The price index for electricity increased at an annualized 2.8 percent. Electricity was included in this month’s trimmed mean—as is often the case—because electricity prices tend to be less volatile than prices for gasoline, natural gas or fuel oil.
More-Processed Food Items Show Some Firming
As was the case in last month’s data, food prices made only a negligible contribution to the headline inflation rate. The price index for food as a whole—which, in the PCE, means food and beverages purchased for consumption at home—increased at an annualized rate of 0.9 percent in August. Again parallel to last month, that overall number embodied largely offsetting changes in the prices of more-processed items and less-processed items.
Significantly, the index for more-processed items increased at a 1.7 percent annualized rate, a step down from July’s 2.6 percent but still a second month of fairly solid increase. To the extent that price movements for more-processed food items are indicative of underlying inflation trends, they would not be out of place in a core price index—and, in fact, the pickup in their rate of price increase over the past two months is consistent with the modest pickup we see in monthly core PCE inflation.
The most-processed food of all—dining out—is part of core PCE, as of last year’s comprehensive revision. That component posted a 4.1 percent annualized increase in August, its largest one-month gain since January 2009, after falling an annualized 1 percent in July.
Inside the Core
As noted above, core PCE increased at a 1.4 percent annualized rate in August, in line with its 12-month increase, also 1.4 percent, from August 2009 to August 2010. Underlying the August core rate were a 0.8 percent annualized increase in the prices of core goods and a 1.6 percent increase in the prices of core services. For the 12-month period ending in August, core goods inflation has averaged a negligible –0.1 percent, up from –0.3 percent for the 12 months through July, while core services inflation has averaged a more solid 1.9 percent, unchanged from July.
The price indexes for airline services, hotels and motels, and items purchased by the nonprofit sector on behalf of households all made noticeable negative contributions to the August core rate, while the indexes for prescription drugs, physicians’ services, jewelry, nonprofit hospitals and commercial bank services made noticeable contributions in the positive direction.
Large price swings in either direction are generally not sustained, which is one of the rationales for trimming extreme price movements, whether they are manifested in food, energy or other items. Some of this month’s “big-impact” items are apt to show up on next month’s list—but with an opposite impact.
A Decline in Rent
More informative are movements in the prices of less-volatile items, movements that tend to be sustained over longer periods. In that regard, the August numbers for rent and owners’ equivalent rent (OER) might be seen as slightly troubling. After five consecutive monthly increases—and a general upward drift since last autumn—the price index for rent declined by an annualized 0.8 percent in August. Growth in OER slowed from an annualized 0.7 percent in July to just 0.3 percent in August.
Continued firming in rent and OER would, given their size, provide considerable support to the core PCE rate, so these price movements—particularly the decline in rent—might give us cause for concern. It’s probably too early to sound an alarm, though. On top of the standard caution against making too much out of any one month’s number, the rental market appears to have tightened quite a bit over the past two quarters, and that tightening should produce further increases in the PCE’s rent component. While of short history, swings in the “Market Tightness Index” produced by the National Multi Housing Council (www.nmhc.org) correlate roughly with swings in PCE rent growth, with a lag of a few quarters between movements in the NMHC index and subsequent acceleration or deceleration in rent growth. Right now, the NMHC index is approaching levels reached in 2005–06 and suggests we should see more of a pickup in rent growth in the months ahead. OER should follow, with some lag.
Number of Falling-Price Items Remains High
Among the 178 components that potentially go into the trimmed mean, 77 registered declines in price, up from 66 in July. As has been the case for nearly two years, the fraction of components experiencing price declines remains elevated compared with our average experience over the past 30 years.
Although fewer items increased in price in August as compared with July, among those for which prices did go up, increases were typically larger in August than in July. Our trimmed mean PCE webpage (www.dallasfed.org/data/pce/index.html) has a chart illustrating this. The chart shows the fraction of components (weighted by importance in household expenditure) that experienced price increases in various ranges—0 to 2 percent, 2 to 3 percent and so forth. August saw a substantial increase in the fraction of components with prices increasing in the ranges from 2 to 10 percent, mostly at the expense of the tamer 0 to 2 percent category.
October 1, 2010