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Behind the Numbers: PCE Inflation Update, February 2011

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 posted an annualized rate of increase of 4.9 percent in February, its fastest one-month rate of increase since June 2009. That makes three straight months of headline readings in excess of annualized 3 percent. For those three months, the headline index has averaged an annualized 4 percent inflation rate. The index’s 12-month rate climbed to 1.6 percent, from 1.2 percent in January.

As has been the case since the middle of last year, rising energy prices—especially for gasoline—contributed significantly to February’s headline rate. Gasoline alone accounted for about 2.0 annualized percentage points out of February’s 4.9 percent annualized headline rate.

For a second straight month, though, food price increases also were a significant factor. The index for food and beverages purchased for off-premises consumption (a.k.a. “food at home”) increased at a 9.7 percent annualized rate in February, following an 8.2 percent annualized rate in January.

The core PCE price index increased at an annualized rate of 1.9 percent in February, a second month of increase in the neighborhood of 2 percent, following nine months where the index averaged an annualized inflation rate of just 0.5 percent, and registered a monthly gain in excess of annualized 1 percent just once, in May 2010. The six-month core rate climbed to an annualized 0.9 percent, up from its recent low of 0.4 percent in December.

Regular readers of the Inflation Update know that the Dallas Fed’s trimmed mean PCE index bottomed out earlier than the core index—around the middle of 2010—and has since drifted gradually upward. That trend continued in February as the trimmed mean posted an annualized increase of 2.2 percent, its largest one-month gain since October 2009. The six-month trimmed rate inched up to 1.2 percent from 1.0 percent in January, and compared with a low of 0.7 percent last July.

Energy Boosts Headline Rate Again, More Gas Pains on the Way

On a seasonally adjusted basis, the price index for gasoline increased 4.8 percent in February at a monthly rate, or about 76 percent at an annualized rate. Among other energy goods and services, fuel oil (up at a 96 percent annualized rate) and natural gas (50 percent annualized rate) also posted sharp increases, though gasoline—given its large expenditure share of about 3.6 percent—made by far the biggest contribution of any single component, energy or otherwise, to February’s headline rate.

Compared with February 2010, the price index for gasoline (and other motor fuel) is up roughly 19 percent. Not surprisingly, that increase is about on par with the increase we’ve seen over the same period in the price of crude oil.

Looking forward to PCE data for March, we have in hand three weeks’ worth of Department of Energy (DOE) data on average retail gasoline prices. Those data show March gasoline prices tracking at an increase of about 12.4 percent compared with February. That seems like an enormous one-month increase, but it is important to take into account the seasonal pattern in gasoline prices (the DOE data are not seasonally adjusted). March is a month in which we normally observe a hefty increase in gasoline prices, around 5.8 percent for the past several years. A 12.4 increase when the typical seasonal pattern calls for a 5.8 percent increase means a seasonally adjusted increase of 6.6 percent—still quite large and a bit bigger than February’s increase.

Thus, everything else equal, a little over 2 annualized percentage points of inflation are baked into March’s headline PCE rate already, just based on the price of gasoline.

U.S. Consumers Starting to Feel Global Food Price Surge

Global food prices have been soaring, beginning to climb in spring 2009 and really taking off since spring 2010. Since February 2009, the world food price index of the United Nations’ Food and Agriculture Organization has risen roughly 67 percent.[1]Through the end of 2010, U.S. consumers were largely sheltered from that price surge. From February 2009 to December 2010, the PCE price index for food at home was essentially unchanged—precisely, the index was down a slight 0.1 percent over those 22 months.

All that has changed over the past two months, as the PCE price index for food at home has increased 1.4 percent, or at an average annualized rate of 9 percent. February’s gain was led by a roughly 25 percent annualized rate of increase in prices of items at the less-processed end of the food spectrum.

Large price movements among less-processed items are not that surprising, and, in general, not that informative regarding future food price movements. More noteworthy is the 4.5 percent annualized rate of increase in the prices of items at the more-processed end of the food spectrum. (The behavior of the prices of these items is actually a better predictor of the future path of prices for less-processed items than is the behavior of the prices of the less-processed items themselves!)

That 4.5 percent annualized increase for prices of more-processed items follows a roughly 6 percent annualized increase in January. Back-to-back increases of that size last occurred in November and December of 2008, just before the bottom fell out below domestic food prices. At that time—several months after the last peak in world food prices—12-month inflation in PCE prices for more-processed food items had reached 8 percent.

The Core Is Catching Up to the Trimmed Mean

Core PCE is finally catching up to the trimmed mean and to other measures of underlying inflation—like the Cleveland Fed’s median CPI and trimmed mean CPI—that have been showing a turnaround since about the middle of 2010.

As noted above, the past two months have seen core rates of around annualized 2 percent, something we’ve not seen, in consecutive months, since 2009. The six-month core rate, which had been falling fairly steadily since late 2009, ticked up for a second month in a row, to 0.9 percent from January’s 0.6 percent, itself up from December’s 0.4 percent.

The six-month trimmed mean rate, which tends to be smoother than the core rate, has also accelerated by 0.5 percentage points, though more gradually over a longer period of time, from a low of 0.7 percent in July 2010 to 1.2 percent in February.

While the underlying trend in PCE inflation appears to have turned, it’s worth emphasizing that recent six-month rates remain quite low.

Big-Impact Items in the Core, More Noise from Apparel

Compared with January, February saw a slower rate of increase in the prices of core goods—0.9 percent annualized, compared with 3.4 percent in January—but a faster rate of increase for core services, which make up the bulk (about 80 percent) of the index. Prices for core services posted a 2.2 percent annualized rate of increase in February, compared with a 1.5 percent rate in January.

Among items pulling the core rate down, apparel prices had a large impact, with prices for women’s and girls’ clothing shaving about 0.5 annualized percentage points off the February core rate. February’s outsized decline in apparel prices—about 11 percent at an annualized rate—largely erases an outsized increase in January.

Air transportation services, prescription drugs and physicians’ services all made notable positive contributions to February’s core rate, with each contributing roughly 0.2 annualized percentage points.

Rent Growth Slows Slightly, OER Continues to Pick Up

Rent and owners’ equivalent rent (OER), two of the largest components in core PCE, each posted 1.7 percent annualized rates of increase in February. For OER, this represents a pickup from January’s 1.2 percent rate, while for rent, February’s number represents a decline from January’s 2 percent rate of increase.

Since posting a 2.6 percent annualized rate of increase in November 2010, the rent index’s increase each month has been slightly smaller than the month before, though the rates have all been well above the lows recorded from early 2009 to mid-2010. Whether this indicates a turning point is unclear—the “market tightness” index of the National Multi Housing Council points to no noticeable change in apartment market conditions between fourth quarter 2010 and first quarter 2011. Given the size of rent in the PCE market basket—nearly 4 percent of the core—these data will bear watching over the next several months.

A Second Month of Significantly Fewer Falling-Price Items

Finally, each month we track the number of components in the PCE basket that register price declines. We began doing that even before we published our first Inflation Update because it seemed to us that an indicator of the breadth of price declines was useful for gauging deflationary pressures. The 2.2 percent drop in the headline PCE price index from September 2008 to December 2008, for example, owed much to a decline in one price—that of gasoline, which fell 50 percent over three months. Price declines limited to one item, or a handful of items, is not deflation, hence our interest in counting the number of price declines each month.

That count has now registered a second consecutive value that one might call normal—55 out of 178 components in February, or about 31 percent of the basket. In January, 53 components registered price declines. From October 2008 to December 2010, the number of falling-price components averaged 70, or about 39 percent of the 178 components.

—Jim Dolmas
March 28, 2011

Note

  1. See FAO Food Price Index, http://www.fao.org/worldfoodsituation/wfs-home/foodpricesindex/en/.
 

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