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Behind the Numbers: PCE Inflation Update, September 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 1.0 percent annualized rate in September, down from an average annualized 2.4 percent in July and August. As was the case in July and August, rising gasoline prices accounted for much of September’s increase in the headline index. Recent weekly data on gas prices predict an even larger boost to the headline PCE rate in October. The 12-month headline rate held steady at 1.4 percent.

The core PCE price index was close to unchanged in September, increasing at a mere 0.3 percent annualized rate, down from an average annualized rate just north of 0.8 percent over the prior two months. Numbers for those two months were revised down from an average annualized rate of 1.3 percent. The 12-month core rate inched down from 1.3 percent to 1.2 percent.

Is the underlying trend in consumer price inflation drifting down further? The trimmed mean PCE inflation rate tells a slightly different story from that told by core PCE. The trimmed mean came in at a 1.0 percent annualized rate in September, compared with an annualized 1.3 percent in August. The numbers for those two months are both above the rates we saw earlier in 2010, and the 12-month trimmed mean rate has been steady over the past six months, within 0.1 percentage points of 1 percent (and precisely 1 percent for the past three months).

If the trimmed mean is a better gauge of the underlying trend in PCE inflation (and we think it is), then it's not too surprising that the core PCE rate should be moving down toward the lower (and steadier) trimmed mean rate. And the message the trimmed mean is sending is consistent with the bottom line we’ve drawn in the past couple of inflation updates: The underlying trend in inflation appears, for the time being, to be holding steady, albeit at an exceptionally low rate.

Gasoline Prices Boost September Headline Rate; Larger Jump Likely for October

Why do we look at inflation gauges that strip out the prices of some items or trim out the most volatile price movements? One need look no further than gasoline to find the answer. Gasoline accounts for about 3 percent of consumer expenditures in the PCE—more emphatically, 97 percent of spending is on stuff other than gasoline—yet gasoline is often the driver behind month-to-month swings in the headline PCE price index. Negative headline rates in April, May and June? Gasoline. Headline rates above an annualized 2 percent in July and August? Gasoline again.

September was no exception to that pattern, and—based on more timely retail price data—October’s headline rate will be even more driven by its motor fuels component. September saw an increase in the price of gasoline of about 1.9 percent at a monthly rate (or roughly 25 percent annualized), yielding a contribution of about 0.7 annualized percentage points to September’s 1.0 percent headline rate.

Looking ahead, as we normally do, using the Department of Energy’s weekly survey of average retail gas prices, we can expect an even larger contribution when PCE data for October are released. Based on four weeks of DOE data, October gasoline is tracking at about a gain of 3.5 percent compared with September. The normal seasonal pattern is a roughly 1.2 percent decline in the price of gasoline from September to October. Combining those observations, we should expect a seasonally adjusted increase on the order of 4.7 percent at a monthly rate, or about 73 percent at an annualized rate. This implies a contribution to the October headline PCE rate from gasoline of about 1.4 annualized percentage points—similar to the boost from gasoline we saw in the July and August data.

Prices for More-Processed Food Items Continue to Firm

Food prices increased at an annualized 3.1 percent in September, well above the rates of increase seen over the prior four months (during which the index for food averaged an annualized –0.2 percent).

The 3.1 percent rate for food as a whole combined a 7.8 percent annualized increase in the prices of items at the less-processed end of the spectrum and a 1.4 percent increase in the prices of items at the more-processed end. The gain in the index for more-processed items represents a third month of fairly solid increase, after several months of very anemic growth (indeed, for the 12 months ending in October, the index for more-processed items is up just 0.3 percent).

As we’ve noted before, 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. Their firming over the past few months is consistent with a stabilization of the underlying trend in inflation. The price index for dining out, which is part of core PCE, also posted another solid gain, 1.5 percent at an annualized rate. Over the past six months, this component has averaged an annualized 1.6 percent rate of increase, after posting average increases of just 0.7 percent in the six months immediately prior.

Big-Impact Items in the Core

The negligible increase in the core PCE price index for September was the product of roughly offsetting movements in the prices for core goods and core services. Core goods prices fell at a rather sharp 1.9 percent annualized rate in September, while core services prices rose at a tame 1 percent annualized rate. The 12-month inflation rate for core goods dipped from –0.1 percent in August to –0.6 percent in September; the 12-month core services rate held steady at 1.8 percent.

Among goods, the components pulling the overall core rate down the most were women’s and girls’ apparel and sporting equipment/supplies/guns and ammunition. Those two components combined to shave about 0.4 annualized percentage points off the September core rate. At the other end of the spectrum, dishes and flatware, jewelry and prescription drugs made noticeable positive contributions, combining to add about 0.4 percentage points to September’s core rate.

Among core services, the price indexes for airline services and items purchased by the nonprofit sector on behalf of households again were significant drags, shaving just over 0.4 annualized percentage points from the September core rate, while nonprofit hospitals and prices for the services of other depository institutions made the most substantial positive contributions (adding about 0.3 percentage points to the overall core rate).

A Healthy Rebound in Rent

In the last inflation update, we took note of a slightly troubling drop in the price index for rent, which broke a string of five consecutive monthly increases and represented a departure from a generally upward-drifting trend in place since last fall. At the time, we noted that the rental market appeared to have tightened quite a bit over the first half of the year, making August’s decline look to be something of a fluke. Data for September tend to confirm that supposition—the index for rent increased 1.6 percent at an annualized rate, its biggest one-month gain since April 2009.

Owners’ equivalent rent (OER), which tends to move together with rent, increased at a 0.4 percent annualized rate in September—quite low, to be sure, but a fifth consecutive positive reading after a period of six straight monthly drops from September 2009 to April 2010.

Number of Falling-Price Items Remains High

Among the 178 components that potentially go into the trimmed mean, 73 registered declines in price in September, 104 registered increases, and one—motorcycles—was exactly unchanged. 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.

To be sure, there have been a few months—in late 1997 and occasionally between late 2001 and late 2003—when the number of falling-price items has spiked to the levels we’ve seen over the past two years, but the sustained elevation since the end of 2008 is unique in our data, which extends back to 1977.

—Jim Dolmas
November 1, 2010

 

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