Behind the Numbers: PCE Inflation Update, November 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.
Underlying consumer price inflation, as measured by the Dallas Fed’s trimmed mean PCE inflation rate, continued at a modest clip in November. The trimmed mean inflation rate for November was an annualized 1.3 percent, following an annualized 0.8 percent rate in October.
For the six months ending in November, the trimmed mean has averaged an annualized 1.4 percent. This is identical to its average rate over the six months ending in October.
The 12-month trimmed mean rate—which is a good rule-of-thumb forecast of headline, or all-items, PCE inflation over the coming 12 months—ticked down to 1.6 percent from 1.7 percent in October.
The headline PCE price index, meanwhile, fell at an annualized 2.6 percent rate in November, weighed down by a sharp decline in the price of gasoline (7.3 percent on a monthly basis, or almost 60 percent annualized). Gasoline prices have continued their decline in December, though so far not by enough to produce another negative headline inflation rate.
On either a six- or 12-month basis, headline PCE inflation is currently close to trimmed mean PCE inflation. The six-month headline rate for November was an annualized 1.5 percent, unchanged from October. The headline index’s 12-month rate for November was 1.4 percent, down from 1.7 percent a month earlier.
Gasoline Almost the Whole Story of November’s Negative Headline Rate
The decline in the price of gasoline in November, a seasonally adjusted 7.3 percent, more than accounted for November’s –2.6 percent annualized headline inflation rate. In terms of annualized percentage points, gasoline contributed approximately –3.4 percentage points, which were offset to some degree by positive contributions from food (about 0.2 annualized percentage points), electricity (about 0.2 percentage points) and everything apart from food and energy (about 0.4 percentage points).
Gasoline prices have continued to slide in December, though much of the decline is likely seasonal in nature. Weekly retail price data from the Department of Energy (DOE) show December gasoline prices on pace for a roughly 3.5 percent decline from November. Normally, when we reference these DOE data in the Inflation Update, we have a fairly complete picture for the current month. This month, though, owing to the very early PCE release date, we are working with much less complete data—just the first three weeks of December. So, that 3.5 percent decline that we currently see in the weekly data could very well deepen (or, less likely, abate) as more data come in.
In any event, the typical seasonal pattern for December calls for a roughly 2 percent decline. Thus, if gasoline prices do finish December down about 3.5 percent, on average, from November, the seasonally adjusted change—which is what matters for figuring PCE inflation—will only be a decline of 1.5 percent.
A decline of that size is probably not enough to push the December headline rate into negative territory, though it would certainly take a sizeable bite out of it. Given gasoline’s expenditure weight, a 1.5 percent decline in price implies a contribution to headline PCE inflation of about –0.05 percentage points at a monthly rate (or about –0.6 annualized percentage points).
Prices for More-Processed Food Items Pick Up Steam
Food prices rose noticeably for a second straight month in November. The PCE price index for food and beverages purchased for off-premises consumption increased at a 2.7 percent annualized rate in November, following a 3.6 percent rate in October. Food price increases had, on average, been mostly modest prior to October—for the six months ending in September, the food price index increased just 0.5 percent at an annualized rate.
November’s increase was different from October’s, though, in the breakdown between prices for less-processed food items and prices for more-processed food items. October’s increase, as we noted in last month’s update, was driven primarily by a jump in prices at the less-processed end of the spectrum. Those prices tend to be very volatile and not necessarily indicative of the underlying trend in food price inflation.
In November the gain came mainly from prices at the more-processed end of the spectrum. Our price index for more-processed food increased at an annualized rate of 3.2 percent in November, its biggest one-month increase since February.
It’s too soon to say whether this portends a faster pace of food price inflation over the coming months; the more-processed index is, we think, more indicative of the trend in food price inflation, but one month’s data is still just one month’s data.
For now, though, at least on a six- or 12-month basis, food price inflation remains modest. Overall food prices are up an annualized 1.5 percent over the past six months and 1.3 percent over the past 12 months. For our price index of more-processed food items, the comparable numbers are 0.4 percent, annualized, over six months and 1.0 percent over 12 months.
Core Services Up, Core Goods Down; On Net, It’s About a Wash
Core goods prices fell at a 2.4 percent annualized rate in November, while core services prices rose at a 1.5 percent rate. Given their relative sizes–as fractions of expenditure, core services are just about twice the size of core goods–those opposite movements nearly offset one another. As noted above in our discussion of gasoline prices, core goods and services together contributed just about 0.4 annualized percentage points to November’s headline inflation rate.
The drop in core goods prices follows several months of either declines or very modest increases. On a six-month basis, core goods prices are down an annualized 0.6 percent. Over the past 12 months, they have declined roughly 0.1 percent. The recent declines represent a rather dramatic turnaround from a year ago. In November of 2011, the six- and 12-month inflation rates for core goods stood at 0.9 percent and 1.1 percent, respectively (and, in fact, the six-month rate was then on its way down from a peak of 2.2 percent in June 2011).
Apart from a few items, like televisions and computers, that typically decline in price (after adjusting for improvements in quality), the biggest contributors to the recent slide in core goods prices have been “games, toys and hobbies” (down an annualized 8.5 percent over the past six months), women’s and girls’ clothing (down an annualized 1.5 percent), and used light trucks (down 6.4 percent). Women’s and girls’ clothing was the biggest-impact item, among core goods, in November; falling an annualized 15 percent, it alone shaved about 0.2 annualized percentage points off the November headline inflation rate.
Prices for core services, as a whole, are always less volatile than prices for core goods. November’s 1.5 percent annualized increase is about in line with the average rate of increase we’ve seen over the past six months (an annualized 1.6 percent). Unlike core goods inflation, which has been steadily decelerating since mid-2011, core services inflation looks to have peaked just this past spring. The six-month inflation rate in our index of core services prices hit an annualized 2.6 percent in April 2012 and has shed a full percentage point since then. Over the past 12 months, the core services index is up 2.0 percent.
Airfares and non-fee commercial bank services made the most significant negative contributions among core services in November. The PCE price index for air transportation fell an annualized 27 percent, though this largely just erases a similarly sized gain the month before. The index for commercial bank services fell an annualized 15 percent, a fourth straight month of comparably sized declines. The two components together contributed about –0.25 annualized percentage points to November’s headline inflation rate.
At the positive end of the spectrum, only nonprofit hospital services had both an outsized price increase and a significant impact: Up at a 3.9 percent annualized rate in November, it contributed about 0.3 annualized percentage points to the headline inflation rate.
Of course, the hefty categories of rent and owners’ equivalent rent (OER) also had large impacts, though their price behavior was not that extreme—rent increased at a 2.3 percent annualized rate in November, while OER increased at a 2.4 percent rate. Those numbers are in line with what we’ve seen of late from both categories.
Last, the price index for “other purchased meals”—basically, dining out—increased at a 1.3 percent annualized rate in November. This component has seen a pretty stark deceleration over the past three months. Over the 12 months through August, the index averaged a 3 percent rate of increase; over the past three months, that rate of increase has averaged just an annualized 1.3 percent.
“Other purchased meals” is a core services component that we should probably devote more attention to here in the Inflation Update. Expenditure-wise, it’s weighty, with a share of 4.4 percent, and it’s also not very volatile—in fact, it’s among the least volatile of all PCE components.
Share of Falling-Price Items Moves Down Toward Normal
For the past few months, we’ve noted that the fraction of PCE components registering price declines has been elevated, with around 40 percent of the 178 components that potentially go into the trimmed mean falling in price. This was true of each month from July through October, but November has broken that string—the share of falling-price components declined to 34 percent of the basket. Historically, a normal falling-price share is in the range of 30 to 32 percent, so November’s reading brings us much closer to normal than we had seen for several months.
December 21, 2012