Behind the Numbers: PCE Inflation Update, June 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.
For a second straight month, declines in the price of gasoline exerted a significant drag on the headline PCE inflation rate. The June headline rate came in at an annualized –2.0 percent. Gasoline alone subtracted roughly 3 annualized percentage points, which were partly offset by contributions from food and PCE excluding food and energy. The six-month headline rate dropped to an annualized 3.0 percent, from 3.9 percent a month earlier. The12-month headline rate held steady at 2.6 percent.
As we discuss below, given recent movements in the price of gasoline, we’re not likely to see another weak headline number when data for July are released. On the contrary, we’re apt to see a very robust headline rate in July’s data.
Both core PCE and the trimmed mean PCE turned in their softest readings of the year: The core posted an annualized rate of 1.4 percent in June, while the trimmed mean came in at an annualized 1.3 percent. Those compare with average annualized rates of 2.2 percent and 2.1 percent, respectively, over the first five months of the year.
The six-month core rate edged up, to 2.1 percent from 1.9 percent in May, while the six-month trimmed inflation mean rate held steady at 1.9 percent. The 12-month rates for both indexes were unchanged from a month earlier—the core at 1.3 percent and the trimmed mean at 1.5 percent.
While the latest release, particularly our trimmed mean number, shades our assessment down slightly, we don’t like to make too much of one month’s data. Our favorite gauge, as a balance of bringing in timely information while smoothing out some of the month-to-month wiggles, is the six-month trimmed mean rate. Thus, for the time being, we continue to see the underlying trend rate of PCE inflation as being near 2.0 percent.
Expect a Healthy Pop from Gasoline Prices in Next Month’s Data
The PCE price index for gasoline fell 6.6 percent in June—not annualized—after falling 2.3 percent in May. Gasoline prices reflect many factors, but the main determinant is the price of crude oil, which fell by about $18 per barrel over May and June. Crude oil’s decline was halted in July, as was the decline in gasoline prices. In the second half of July, gasoline prices began to inch back upward.
According to weekly retail price data from the Department of Energy—of which we now have a full month’s worth—the average price of a gallon of gasoline was down just 0.8 percent in July compared with June. Those DOE data are not seasonally adjusted, and July, in recent years, is a month which features a sharp seasonal decline in prices—the estimate of last July’s seasonal effect is a 6.2 percent decline.
A 0.8 percent decline, when a 6.2 percent decline is typical for the month, translates into a 5.4 percent increase in the seasonally adjusted price, which is relevant for July’s headline PCE rate. Given gasoline’s weight in the PCE—about 4 percent of consumer expenditure—we can expect gasoline alone to contribute about 0.2 monthly percentage points, or about 2.4 annualized percentage points, to July’s headline rate.
Assuming that neither food prices nor prices outside of food and energy show declines, next month’s headline rate will be somewhere north of an annualized 2.4 percent. If, for example, every component apart from gasoline repeats its June performance in July, July’s headline rate will come in at roughly 3.3 percent, annualized. That wouldn’t be quite a return to the 4.5 percent average rate we experienced over January–April, but nevertheless a big departure from the mild headline rates of the past two months.
Food Price Gains Moderate a Bit, But Trend Rate of Food Inflation Still Looks Elevated
The PCE price index for food recorded its smallest increase so far in 2011, just 1.8 percent annualized, down from a 4.2 percent rate in May. May’s rate itself was quite a step down from the average 8.6 percent rate the food index posted over January–April.
As was the case in May, though, June’s figure was pulled down by items at the less-processed end of the food spectrum. Our own index for less-processed-food prices fell in June at an annualized rate of 4.2 percent, partially offsetting a 4.2 percent rate of increase in the larger more-processed-food category.
We’ve argued in past Inflation Updates—and will assert again in this Update—that movements in less-processed-food prices are less informative about the underlying trend in food price inflation than are movements in more-processed-food prices. We have, in fact, written a Dallas Fed Economic Letter on the subject; it’s available online.
With that in mind, note that the step-down in more-processed-food price inflation has been rather slight—4.2 percent in June compares with an average annualized rate of 5.3 percent over the prior five months. The trend may be moderating, but only very gradually, and remains quite elevated.
Core Services Inflation Softens, Core Goods Prices Continue Robust Gains
The softness in the core PCE rate for June, just 1.3 percent annualized, owes mostly to a slower rate of increase in prices for core services. Core services inflation came in at just 0.4 percent, annualized, in June, down from a 3 percent rate in May, and compared with an average rate over the past 12 months of 1.6 percent.
The big-ticket items in core services—rent and owners’ equivalent rent (OER)—weren’t the culprits behind the deceleration. Rent posted an annualized rate of increase of 1.3 percent, compared with 1.4 percent in May, while OER had its strongest showing in many months, posting an annualized rate of 1.9 percent, its fastest one-month pace since March of 2009.
Which service components, then, were the source of the drag? Declines in the price indexes for airfare (–38 percent annualized) and commercial bank services (–19 percent) and a rare decline in the price index for physician services (–1.5 percent) combined to shave about a full annualized percentage point off the June core services rate. An 11 percent annualized decline in the price index for final consumption expenditures of nonprofit institutions serving households—a component with volatility proportional to the length of its name—subtracted about half an annualized percentage point (after adding about that much in the prior month).
Against those impactful declines, a 50 percent annualized increase in the price index for hotels and motels was the only big-impact increase among core services, contributing about 0.4 annualized percentage points to June’s core services rate.
Core goods prices, on the other hand, continued their recent string of very robust increases, rising at an annualized rate of 4.1 percent in June. That’s the biggest one-month gain in core goods prices since April 2009’s 6.2 percent rate. As was the case in May’s data, the surge in core goods prices was again led by apparel, with the index for men’s and boys’ clothing up at a 35 percent annualized rate, and the index for women’s and girls’ clothing up at an 18 percent rate. Those two clothing components combined to contribute roughly 0.5 annualized percentage points to June’s overall core rate (and a whopping 1.9 percentage points to the June core goods rate).
Fewer Falling-Price Items, More Items with Slower Rates of Increase
Looking at the distribution of price changes among the 178 components that potentially go into the trimmed mean each month, about 32 percent of those components registered declines. That number is up a bit from last month’s 26 percent but is still in the range of what we’d consider normal, as opposed to elevated.
When components are weighted by their shares of consumer expenditure, we also see an increase in the share experiencing declines, from 23 percent to 28 percent (and, equivalently, a decrease in the share experiencing price increases, from 77 percent to 72 percent). More notable is a shift in weight, among the rising components, from faster rates of increase (better than 2 percent) to slower rates. For a visual depiction of this shift, see the chart on our trimmed mean PCE webpage.
The Annual Revision
This month’s PCE release reflects the results of the BEA’s annual revision to the National Income and Product Accounts, the source for the data we use to calculate the trimmed mean. The revision—which incorporates more complete price and quantity data, as well as some methodological improvements—had only very minor effects on the recent behavior of headline, core and trimmed mean inflation. An overview of the BEA’s revision is available on the BEA website, in PDF form.
August 5, 2011