Behind the Numbers: PCE Inflation Update, March 2012
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 Dallas Fed’s trimmed mean PCE inflation rate came in at an annualized 2 percent in March, up from 1.7 percent rates in each of the prior two months. Over the past year, the monthly readings for the trimmed mean have bounced in a range from 1.4 percent to 2.3 percent. Lately, the rates have been more often below 2 percent than above, with sub-2-percent rates recorded in five out of the six months prior to March.
Consequently, the 12-month trimmed mean rate has been quite steady, posting a fifth consecutive 1.9 percent in March. The six-month trimmed mean rate, which had ticked down to an annualized 1.7 percent in February, ticked back up to 1.8 percent in March. Since hitting 2 percent last July, the six-month trimmed mean rates have generally inched downward.
In last month’s Inflation Update, our bottom line, based on the behavior of the six- and 12-month trimmed mean rates, was that underlying PCE inflation was “at the very least, steady, if not slightly decelerating.” Given that slight uptick in the six-month rate, we’re inclined to put a bit more weight on steady, rather than decelerating. The trend remains just below 2 percent in either case.
As we’ve noted before, our trimmed mean rate is an attempt to capture, in real time, the underlying trend in the headline, or all-items, PCE inflation rate. In March, the headline index posted a 2.5 percent annualized rate of increase, down from a 4 percent rate in February. Similar to both January and February, March’s headline number was driven to a great extent by rising gasoline prices, with gasoline contributing roughly 0.7 annualized percentage points to the headline rate.
Owing largely to those gasoline price increases, the headline rate has averaged an annualized 3.1 percent over the first three months of the year; over the last three months of last year, the headline rate averaged a very modest 0.7 percent. The six-month headline rate inched up to 1.9 percent from 1.8 percent in February, while the index’s 12-month rate fell further to 2.1 percent from 2.3 percent. The 12-month headline rate had been as high as 2.9 percent last September.
Energy Price Movements Remain Mixed But, on Net, Positive
Gasoline prices increased at a 1.7 percent monthly rate in March, or about 22 percent annualized. The PCE price index for gasoline and other motor fuel has increased 8.7 percent over the first three months of 2012 (about a 40 percent annualized rate), after declining 5.3 percent over the last three months of 2011 (about a –20 percent annualized rate).
As we noted last month, declines in natural gas prices have, to some extent, offset the impact of higher gasoline prices on a six-month basis. March, though, saw the first increase in the price index for natural gas services since last September, a 0.9 percent gain at a monthly rate, or about 10 percent at an annualized rate.
In this case, though, the price of electricity provided some relief to consumers. The index for electricity services—which is quite a bit less volatile than other energy components—posted a 0.8 percent decline in March (roughly a –9 percent annualized rate). Given the size of the decline (about half as big as gasoline’s price increase) and electricity’s weight in expenditure (less than half the weight of gasoline), the offset from electricity in March was necessarily less-than-complete: Against gasoline’s contribution of 0.7 percentage points to the March headline rate, electricity subtracted about 0.2 percentage points.
Given that the average retail price of a gallon of gasoline neared $4 in April, should we expect another large positive contribution from gasoline when PCE data for April come out? Probably not—weekly retail data collected by the Department of Energy show the price of gasoline tracking at a roughly 1.8 percent increase compared with March. That gain—if it holds up when all the data become available—is below the typical seasonal gain we’d expect for April (about 4.7 percent). The April PCE data are thus likely to show a seasonally adjusted decline, on the order of 2.9 percent, in the price index for gasoline. That would correspond to a contribution of about –1.8 annualized percentage points to April’s headline PCE inflation rate.
Chickens and Eggs Notwithstanding, the Trend in Food Price Inflation Continues to Moderate
Food prices increased at a 1.6 percent annualized rate in March, after declining at a 0.2 percent rate in February. Notably, for the first time in the past six months, our price index for less-processed food items posted a bigger increase than our index for more-processed items.
The less-processed index registered a 3.2 percent annualized increase after declining in each of the prior two months. Sharp increases in prices for eggs (32 percent, annualized) and poultry (18 percent) led the index upward.
In contrast, our more-processed food index—which we believe is more informative of the trend in food prices—posted a modest 1 percent annualized increase, down from 3.4 percent a month earlier. That prior gain was in line with the index’s six-month rate through February, an annualized 3.5 percent. The six-month rate for the more-processed index, which had drifted down from a rate in excess of 5 percent last October, took a larger step down in March, falling to 2.7 percent.
Over the same six months, the all-items food index is up just 1.3 percent, annualized, pulled down by a 2 percent annualized decline in the price index for less-processed items.
Core Goods Prices Rebound; Core Services More Stable
Outside of food and energy, March saw a jump in core goods prices, which increased at a 1.4 percent annualized rate, after falling at a 0.9 percent rate in February.
Personal hygiene got a bit more expensive in March, with the price index for “hair, dental, shaving and miscellaneous personal care products except electrical products” posting a 19 percent annualized rate of increase. Men’s and boys’ clothing (10.4 percent) and used vehicles (12.4 percent) also recorded sizeable increases. Together, these three components contributed about a quarter of an annualized percentage point to March’s headline rate and account for the bulk of the increase in the index of core goods prices.
Core services inflation, meanwhile, decelerated a bit, to a 2.1 percent annualized rate in March compared with a 2.7 percent rate in each of the prior two months. As was the case in February, a couple of components of financial services again had noticeable impacts—the price indexes for “financial services furnished without payment: other depository institutions and regulated investment companies,” and “financial service charges, fees and commissions” each shaved about 0.2 annualized percentage points off March’s headline inflation rate. The price index for physicians’ services subtracted a further 0.1 percentage point, and the index for the final consumption expenditures of nonprofit institutions serving households added about 0.2 percentage points.
Both rent and owners’ equivalent rent (OER) posted increases in the neighborhood of an annualized 2 percent—2.1 percent for rent and 2.3 percent for OER. The increase in OER is about in line with its average pace over the past six months, and in fact OER growth has been very steady over that period. Rent, in contrast, has been generally decelerating—its 2.1 percent rate for March was below its six-month rate of 2.7 percent, itself down from 3.3 percent at the end of last year.
Over the past six months, our price indexes for core goods and core services are running at annualized rates of 0.6 percent and 2.4 percent, respectively. On a 12-month basis—still reflecting the rapid gains we saw last April through August—core goods inflation is running at 1.2 percent, which remains quite high by the standards of recent history.
Share of Falling-Price Items Inches Down to Normal
Finally, the fraction of PCE components registering price declines looked essentially normal in March, with 33 percent of the 178 components registering price declines, down from 34 percent a month earlier and 35 percent the month before that.
When components are weighted by their shares of expenditure, about 19 percent of the PCE basket declined in price, and about 81 percent increased in price in March. That rising fraction is up from 76 a month earlier, and the highest we’ve seen since last July. Within the distribution of components rising in price, there was also some shift in weight from the 0–2 percent range to the 2–3 percent range, probably accounted for mostly by OER’s pickup from a 1.2 percent rate in February to a 2.3 percent rate in March.
In contrast, the share of items experiencing very rapid price increases—better than a 3 percent annualized rate—held steady at 35 percent, around where that fraction had been in each of the prior two months.
April 30, 2012