Behind the Numbers: PCE Inflation Update, July 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 for July was an annualized 0.9 percent, marking a fourth straight month of modest readings. July’s rate comes on the heels of a three-month span during which the trimmed mean averaged an annualized 1.5 percent.
The six-month trimmed mean rate fell to an annualized 1.5 percent from 1.8 percent a month earlier. The six-month rate had reached 2.2 percent last August but has been drifting generally downward since. The 12-month trimmed mean rate ticked down to 1.8 percent from 1.9 percent in June.
At the same time, the headline PCE price index registered a negligible increase in July, increasing at an annualized rate of just 0.1 percent. The six-month headline rate fell to an annualized 1.0 percent from 1.5 in June, while the 12-month headline rate dipped to 1.3 percent from 1.5 in June.
July’s headline rate was pulled down by slight declines in the price indexes for energy goods and services and for food, but also reflects negligible gains (on average) in the prices of items apart from energy and food.
The negative contribution from energy is not likely to be repeated in next month’s release, as gasoline prices—which rose slightly in July—have jumped significantly in August. And, as we discussed in last month’s update, the pace of food price inflation is apt to pick up in the coming months, as sharply higher grain prices eventually feed through to prices at the consumer level.
Large Impact from Gasoline in the Pipeline for August
As we expected in last month’s Inflation Update, the PCE price index for gasoline and other motor fuel rose only slightly in July, increasing a little over 0.2 percent (or about 3 percent annualized). Given gasoline’s weight in the headline index, that 0.2 percent increase was enough to contribute about 0.1 annualized percentage points to July’s headline rate. That contribution was more than offset, though, by a 1.3 percent decline (15 percent annualized) in the price index for electricity services, which shaved about a quarter of an annualized percentage point off the headline rate.
It’s rare to see gasoline not being the biggest-impact component among energy goods and services. Barring some very surprising movements in prices for electricity, natural gas or fuel oil, we will not see a repeat of that rare occurrence in the release of PCE data for August. August, it turns out, has experienced one of the largest jumps in the price of gasoline in recent memory.
Based on weekly retail data collected by the Department of Energy (DOE), the price of gasoline in August is on track to be up over 8 percent compared with July (not annualized). That comes in a month when the typical seasonal change is a 2.7 percent decline. An 8 percent increase when a 2.7 percent decline is expected translates into a seasonally adjusted increase of nearly 11 percent. There have only been a handful of months over the past 25 years that have seen gasoline price increases of that size, the most recent being a 20 percent jump in June 2009.
Assuming that 11 percent jump comes to pass—which is likely, since we have nearly complete DOE data for August—gasoline alone would contribute about 5 annualized percentage points to August’s headline rate.
Food Price Inflation Continues to Slow (for Now)
Prices of food, as a whole, were essentially unchanged in July, with the price index for overall food falling by less than an annualized 0.1 percent. Food’s six-month rate of increase fell to an annualized 0.7 percent from 1.0 percent in June, while its 12-month rate of increase fell to 2.0 percent from 2.4 percent.
Underlying July’s essentially zero rate of food price inflation were a sharp increase in prices of less-processed food items (up an annualized 5.7 percent) and a significant decrease in the prices of more-processed food items (down an annualized 2.3 percent).
Over the past six months, our index of more-processed items—which we think is a better indicator of the trend in food price inflation—is up just 0.2 percent, annualized. Six months ago, that six-month rate stood at an annualized 4.1 percent.
In last month’s Inflation Update, we touched on the impact of the drought in the Midwest on food prices over the coming months. At the producer level, prices for grains have already spiked, with prices for corn, soybeans, sorghum and wheat increasing between 12 and 25 percent in July. We would expect those price movements to be manifest rather quickly in the prices of less-processed food items. The extent of their pass-through to the prices of more-processed items should be mitigated by the fact that producing more-processed food items involves a higher proportion of other inputs—labor, capital and nonagricultural raw materials.
Since more-processed items are also typically items with brand identity—and produced by firms that exercise some pricing power—we would also expect pass-through to depend on the extent to which the movements in agricultural prices are perceived as either temporary, and apt to be reversed soon, or more long-lasting. Over the coming months, movements in our index of more-processed food items may thus give us some clue as to the durability of the recent jumps in agricultural commodity prices.
Negligible Increases for Core Goods and Services
As we noted above, price movements in items apart from food or energy, on average, were also close to nil in July. Both our index of core goods prices and our index of core services prices posted negligible increases in July. Core goods prices increased at an annualized rate of just under 0.2 percent in July, while core services prices increased at a 0.4 percent annualized rate.
The small increase in core goods prices is in line with that index’s behavior over the past several months. On a six-month basis, our index for core goods prices is up an annualized 0.3 percent; over the past 12 months, it’s up 0.4 percent. The biggest-impact items among core goods in July were jewelry at the negative end (down an annualized 26 percent) and prescription drugs and men’s apparel at the positive end (up 9 percent and 29 percent, respectively).
July’s 0.4 percent annualized increase in core services prices is unusually low—one has to go back more than a year and half to find a comparably small increase. As a result, the six-month core services inflation rate fell to an annualized 2.0 percent from 2.5 percent a month earlier. The index’s 12-month rate ticked down to 2.1 percent in July from 2.2 percent in June.
Among core services, the price indexes for hotels and motels, communication, air transportation and a component of financial services (the imputed price of services provided by “other depository institutions and regulated investment companies”) all registered outsized declines. Those four items combined to contribute about –0.6 annualized percentage points to July’s headline rate.
At the positive end of the spectrum, the service components with the biggest impacts had effects owing more to their hefty expenditure weights than to the size of their price movements. These were rent, owners’ equivalent rent (OER) and “other purchased meals.” Of those three, only rent (up at a 3.8 percent annualized rate) could be reasonably characterized as having “jumped.” Movements in OER (up at a 2.1 percent annualized rate) and other purchased meals (3 percent) were very much in line with their recent past behavior. Even so, the three items combined to contribute about +0.5 annualized percentage points to July’s headline rate.
Number of Falling-Price Components Jumps
Finally, July saw a rather striking jump in the fraction of PCE components declining in price. Of the 178 components that (potentially) go into the trimmed mean, 45 percent declined in price in July, up from 28 percent in June, and compared with an average 33 percent over the first half of 2012. Of course, one month does not make a trend; whether this jump is anything more than a blip remains to be seen.
August 30, 2012