Behind the Numbers: PCE Inflation Update, December 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 increase of just 0.8 percent in December, marking a fourth consecutive month of modest headline rates, after a string of robust readings over the first part of 2011. December’s number comes on the heels of slight declines in October and November and a moderate 2 percent annualized rise in September. For the last four months of the year, headline PCE inflation averaged an annualized 0.5 percent, after averaging a 3.3 percent rate over the first eight months.
As was the case in October and November, a large decline in the price of gasoline ( –21 percent at an annualized rate) weighed down the headline index. That pattern will almost certainly be reversed in next month’s release, given the retail price data for gasoline that we have seen thus far in January.
As for measures of the underlying trend in PCE inflation, core PCE inflation ticked up slightly in December, coming in at a 1.9 percent annualized rate after posting a 1.5 percent rate in November. Indeed, since coming in at a 0 percent rate in September, the core rate has edged up in each subsequent month.
The trimmed mean PCE, in contrast, paints a much steadier picture---if the trimmed mean is picking up, it’s doing so only very gradually. December’s rate of 1.6 percent, annualized, is not that different from November’s 1.5 percent or, for that matter, from the 1.4 and 1.2 percent rates recorded in September and October.
We tend to regard the trimmed mean as the better indicator of the underlying trend in PCE inflation, and by its reckoning, underlying PCE inflation has been fairly steady the past four months, in a neighborhood of 1.5 percent, down from the 2 percent average rate recorded over the first eight months of the year. The six-month trimmed mean rate puts the trend a bit higher, at 1.7 percent, but still down noticeably from mid-2011.
The 12-month rates for headline, core and trimmed mean all held fairly steady in December. The 12-month headline rate inched down to 2.4 percent from 2.6 percent in November, the 12-month core rate inched up to 1.8 percent from 1.7 percent, and the 12-month trimmed mean rate was constant at 1.8 percent.
Bidding Farewell to 2011
Apart from the inevitable revisions, this release closes the books on 2011. It was a year that saw robust price increases for energy goods and services (up 7.2 percent) and food (up 5 percent).
Not surprisingly, given the behavior of food and energy, gains in prices of goods outpaced gains in prices of services, 3.1 percent to 2.1 percent. For the year, the prices of core services also increased 2.1 percent. Core goods, after starting the year at an unusually robust pace fuelled mainly by gains in prices of apparel and autos, finished the year up 1.1 percent. That 1.1 percent is still quite high by the standards of recent history. Unusually strong vehicle prices also contributed to a 1.6 percent core goods rate in 2009, but, apart from that, there is no calendar year since 1995 with a core goods inflation rate that’s even noticeably above zero.
Which components saw the biggest price movements over the year? Fuel oil posted the biggest increase for the year, up 18 percent from December 2010. Televisions recorded the biggest decline, down 17 percent in December 2011 compared with December 2010. (Note that the price index for TVs incorporates quality adjustment—getting more features for the same price counts as a price decline.)
Gasoline’s Drag Set to Reverse
Anyone who bought gasoline in both December and January surely noticed that prices were quite a bit higher in January. And, for this one month of the year, that perception would match what ends up reported as the behavior of the price of gasoline in our indexes of consumer price inflation. January is unique among the 12 months in that its seasonal effect on gasoline prices is practically nil—there’s no “prices typically rise by…” or “prices typically fall by…” for January. Well, there is a typical rise, but it’s extremely small, just a quarter of a percent, compared with seasonal movements of plus or minus one percent to six percent for the other 11 months of the year.
So, given that fairly complete weekly retail price data collected by the Department of Energy show gasoline prices up 3 percent in January compared with December, we can conclude that when January’s PCE data are released, they’ll show a seasonally adjusted increase of about 3 percent.
That won’t fully reverse the slide in gasoline prices that occurred over the last three months of 2011—seasonally adjusted gasoline prices fell in total about 7 percent over those three months. But, it will mean a positive contribution to January’s headline rate—about 1.3 annualized percentage points—after a string of negative contributions.
Looking further ahead, what happens to gasoline prices will depend primarily on what happens to the price of crude oil, and as of right now, markets appear to expect little movement over the coming 12 months—prices for 12-month crude oil futures differ little from today’s spot prices. So, January aside, we can begin 2012 with the expectation that gasoline, on average, will contribute neither positively nor negatively to our headline price index.
That expectation is, of course, sure to prove wrong; what we don’t know, though, is the direction in which it will be wrong.
Food Prices Rebound a Bit
As noted above, food prices finished 2011 up about 5 percent from the end of 2010. Underlying that increase are a 5.7 percent gain in prices of less-processed food items and a 4.8 percent gain in prices of more-processed food items.
In December, the index for all food items increased at 2.2 percent annualized rate, after declining at a 1.7 percent rate the month before. Last month, we noted that while November’s overall decline owed much to a sharp drop in prices for less-processed food items, even our index of prices for more-processed items (which we think is more informative about trends in food price inflation) posted only a very small gain. In December, price gains for more-processed items accelerated, to a 2.4 percent rate from a 0.4 percent rate in November. Even 2.4 percent is below the readings we were seeing over most of 2011, but it would still be premature to declare a downshift in the trend rate of food price inflation.
On a six-month basis, our more-processed index shows a 4.1 percent annualized rate for December, down from 4.4 percent in November, but still quite robust.
Inside the Core
December’s 1.9 percent annualized core rate reflects a 1.3 percent rate of decline in core goods prices and a roughly 3 percent rate of increase in core services prices. An annualized 4.7 percent drop in clothing prices—following an annualized 13 percent rise in November—contributed significantly to the decline in core goods prices.
Within core services, among the biggest impact items were some components of financial services (which on net contributed about +0.4 annualized percentage points to December’s core rate), air transportation (about a +0.2 percentage point contribution) and a couple components of recreation services (about +0.2 percentage points). At the other end of the spectrum, the price index for the final consumption expenditures of nonprofit institutions serving households shaved about 0.2 annualized percentage points off December’s core rate.
Shelter costs—in particular, rent and owners’ equivalent rent (OER)—posted rates of increase in line with their previous month's performance. Rent increased at a 3.1 percent annualized rate (versus a 2.6 percent rate in November), and OER increased at a 2.2 percent annualized rate (compared with 1.7 percent in November). On a 12-month basis, rent is up 2.5 percent, while OER is up 1.8 percent.
Share of Falling-Price Components Inches Back Toward Normalcy
The fraction of components in our PCE basket registering price declines moved a tiny bit closer to normal in December—35 percent of the 178 components recorded price declines in December, down from 37 percent in November, and a whopping 45 percent in October.
When components are weighted by their shares of total expenditure, there was likewise little change in the fraction of components falling in price. Among the items where prices rose, the chart on our PCE webpage (www.dallasfed.org/data/pce/index.html) gives a picture of the breakdown between components experiencing slower or faster rates of increase. There was little change in that distribution from November to December, apart from a small gain in the share of components increasing at a better-than-five-percent annualized rate at the expense of the share of components increasing at rates in the three to five percent range.
January 30, 2012