Behind the Numbers: PCE Inflation Update, March 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 March, after clocking in at 5.1 percent in February and 4.1 percent in January. The three-month headline rate, an annualized 4.7 percent, is the highest since July 2008, when the three-month rate reached 6.6 percent.
Energy price increases were again a major factor, with gasoline prices alone accounting for about half of the March headline increase. As has been the case so far in 2011, food prices also made a significant positive contribution to the headline rate, albeit smaller than the contribution from energy goods and services.
The core PCE price index and the trimmed mean PCE each recorded annualized rates of 1.6 percent in March, after posting annualized rates near 2 percent in February (2.0 percent for the core and 2.1 percent for the trimmed mean).
These two measures of the underlying trend in PCE inflation have been speaking nearly in unison the past three months—the core has averaged a 1.9 percent annualized rate over that time, the trimmed mean 1.8 percent. For both, average rates over the first three months of 2011 are about a full percentage point higher than their average rates over 2010. From December 2009 to December 2010, the core index increased just 0.7 percent. Over the same period, the trimmed mean averaged a 0.8 percent rate of increase.
The six-month core and trimmed mean rates each inched up in March, the core rate from an annualized 1.0 percent to 1.2 percent, and the trimmed mean from 1.2 percent to 1.3 percent.
Gasoline Price Gains Boost Headline Rate (Again), Less Impact Expected in April’s Data
On a seasonally adjusted basis, the PCE price index for gasoline increased 5.6 percent in March, which corresponds to an annualized rate of about 92 percent. To put it somewhat differently, 12 consecutive months like March would nearly double the price index for gasoline.
Over the first three months of the year, the index for gasoline has increased 15 percent, and it is up nearly 30 percent over the past six months. Those figures are not annualized.
Looking ahead, we have nearly a full month’s worth of weekly retail gasoline price data for April, from the Department of Energy (DOE). Those data show April gasoline tracking at an increase of about 6.5 percent compared with March. The DOE data are not seasonally adjusted, and April is a month where gasoline prices typically increase rather sharply—last year, the April seasonal effect was estimated at roughly 4 percent. Subtracting that seasonal increase from 6.5 percent gives us an expected seasonally adjusted increase of 2.5 percent when April’s PCE data come out. While large, that increase would be in the bottom third of the monthly gains we’ve seen over the past nine months. (It seems a distant memory now, but just prior to nine months ago—from February to June 2010, to be precise—gasoline prices were falling.) Barring any unforeseen data developments, gasoline’s contribution to the April headline PCE rate should be about half the size of its contribution in March—about 1.2 annualized percentage points versus about 2.5 annualized percentage points.
Foodflation Continues for Third Straight Month
It has been over two years since U.S. consumers have seen three months of food price increases on par with January, February and March of this year. Over those three months, the PCE price index for food—more precisely, food and beverages purchased for off-premises consumption—increased at an annualized rate of 9.5 percent. The last three-month period with that rate of increase was July–September of 2008. The recent surge has been, perhaps, more dramatic: While the peak in late 2008 was the final blast of a gradual crescendo in food price inflation that began in 2007, the increase over the past three months follows a two-year period of essentially zero food price inflation, on average.
Price gains have been robust across both less-processed and more-processed food items. Over the past three months, our index of less-processed items is up at an annualized rate of roughly 20 percent, while our index of more-processed items is up at a 5.6 percent rate. Historically, the behavior of the more-processed index gives a better indication of the underlying trend in food price inflation. Although it suggests the trend rate of increase is not as bad as indicated by either the 20 percent rate in the less-processed index or the 9.5 percent rate in the all-food index, the more-processed index still points to relatively robust growth in underlying food price inflation. As trends, by definition, evolve only gradually over time, this suggests that U.S. consumers are likely in for a sustained period of elevated food price inflation.
The Core and Trimmed Mean Move Closer Together
Core PCE, as noted above, came in at an annualized rate of 1.6 percent in March. Monthly readings over the first three months of the year—annualized 2.1 percent in January and 2.0 in February, to go with March’s 1.6 percent—represent a substantial break with the monthly rates we saw over most of 2010. (In 2010, we saw only three months with annualized gains in excess of 1 percent, those coming early in the year.)
As we’ve noted in past Inflation Updates, the pick-up in the trimmed mean has been more gradual, beginning around the middle of last year. This is particularly noticeable if one looks at six-month inflation rates. The six-month rate for the trimmed mean began inching up from a low of 0.7 percent in July 2010, reaching 1.0 percent by December 2010. Over the same period, the six-month core rate was still on a generally downward trajectory, eventually bottoming out at 0.4 percent in December 2010.
Given its healthier gains over the first three months of this year, the six-month rates for the two indexes are now quite close, at 1.2 percent for core and 1.3 percent for the trimmed mean.
Big-Impact Items in the Core
Underlying March’s core rate were a 2.3 percent annualized rate of increase in the price index for core services, and a 0.5 percent annualized rate of decline in the price index for core goods.
Accelerations in the rates of increase for both core goods and core services have contributed to the higher core rates we’ve observed over the first three months of 2011, as compared with 2010. Over 2010, our price index for core goods fell 0.8 percent, while our price index for core services rose 1.3 percent. Over the first three months of 2011, the core goods index is up at an annualized rate of 1.1 percent, while the core services index is up at a 2.1 percent rate.
Prices for apparel (both men’s and women’s), personal computers and peripheral computing equipment, and the index for games, toys and hobby items were the leading drags among core goods components in March. Together, these items subtracted roughly half an annualized percentage point from the March core rate. At the other end of the spectrum, prescription drugs were the only core good to contribute more than 0.1 annualized percentage points to the overall core rate.
Among core services, paramedical services made the most substantial negative contribution (a bit more than –0.1 annualized percentage point), while air transportation services, the price index for dining out and the infelicitously named “consumption expenditures of nonprofit institutions serving households” made noteworthy positive contributions. Air transportation alone—which increased at a nearly 57 percent annualized rate—contributed over a quarter of an annualized percentage point to the March core rate.
The price index for dining out—technically, the index for “other purchased meals”—rose at a 3.8 percent annualized rate in March, its biggest one-month gain since January 2009. Movements in this index are worthy of our attention, whether we dine out frequently or not—among all 178 PCE components that potentially go into the trimmed mean each month, the index for dining out is among the most-often included.
Rent and OER Growth Slow Slightly
In last month’s Inflation Update, we noted that monthly increases in the index for rent, while well above the lows recorded from early 2009 to mid-2010, have been successively smaller in every month since November 2010, when the index posted a 2.6 percent annualized gain. That trend continued in March, with rent growth coming in at an annualized 1.6 percent, compared with 1.7 percent in February.
Owner’s equivalent rent (OER) posted its slowest rate of increase of the past five months, an annualized 0.9 percent in March.
Given the weight of these items in the core basket, a persistent slowing in their rates of increase would tend, simply as a matter of math, to be a substantial drag on the overall core rate. As we also noted last month, though, evidence we have on the tightness of rental markets would suggest the recent slowing will not persist. Nevertheless, these data bear close watching as we go forward.
The Number of Falling-Price Items: Not Quite High, Not Quite Normal
Finally, last month we noted that, over the first two months of 2011, the number of falling-price components in our basket of 178 components was—for the first time in quite awhile—somewhat normal, at about 30 percent of the basket. This is in contrast to the generally elevated numbers—around 39 percent of the basket—that we saw, on average, from October 2008 through the end of 2010.
The March figure, 65 components, or around 36 percent of the basket, is both a bit higher than normal and a bit lower than elevated.
April 29, 2011
- As a case in point of the greater information content of the more-processed index, note that over the first six months of 2010—consistent with behavior of crude food prices worldwide—the less-processed food index increased at an average annualized rate of 6.7 percent. Over the same six months, though, the more-processed food price index actually fell, at a 0.9 percent average annualized rate. Sure enough, over the second half of the year, the rate of increase in the less-processed index abated to a 1.8 percent annualized rate, and overall food inflation for the year ended up at a modest 1.2 percent.