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Behind the Numbers: PCE Inflation Update, January 2013

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 pace in January. The trimmed mean inflation rate for January was as an annualized 1.3 percent, in line with its average rate of 1.4 percent over the past six months. The 12-month trimmed mean rate ticked down to 1.5 percent from a revised 1.6 percent in December.

The headline PCE price index was close to unchanged for a second consecutive month, increasing at an annualized rate of just 0.2 percent in January. In December the headline index fell at an annualized 0.2 percent rate. As was the case in the prior three months, a seasonally adjusted decline in gasoline prices helped hold down the headline rate in January.

The headline index has increased 1.4 percent, annualized, over the past six months, and 1.2 percent over the past 12 months.

Using the current 12-month trimmed mean rate as a good rule-of-thumb forecast for headline inflation over the next 12 months, we continue to expect headline PCE inflation to average 1.5 percent over the coming year.

Gasoline Prices Decline Yet Again, But the String Ends With January

January marked a fourth straight month in which gasoline prices (after taking account of seasonal patterns) registered declines, contributing to the very low, and sometimes negative, headline inflation rates we saw over that time. In January, the decline in the price index for gasoline and other motor fuels (3.2 percent, not annualized) shaved about 1.4 annualized percentage points off the headline inflation rate.

We will definitely see that pattern broken when PCE data for February are released, and that should come as no surprise to anyone who has bought gasoline over the past few weeks. Based on weekly retail price data from the Department of Energy, gasoline prices increased a bit more than 10 percent in February. That figure is not annualized, nor does it account for seasonality. The typical seasonal price change for February is a 0.9 percent increase, so after taking that into account we are still left with a hefty seasonally adjusted increase of slightly more than 9 percent. That’s the biggest one-month increase in over three years—since June 2009—and is bigger than all but a handful of one-month increases over the past 50 years.

What does that imply for February’s headline inflation rate? Given gasoline’s expenditure weight of about 3.5 percent, a 9 percent price increase would contribute just over 0.3 percentage points to headline PCE inflation at a monthly rate, or nearly 4 percentage points at an annualized rate. February’s headline inflation rate thus promises to be quite robust.

Among other energy goods and services, electricity and natural gas services combined for a 0.5 percent increase at a monthly rate, while the price index for fuel oil fell 0.2 percent.

No Change in Overall Food Prices, Offsetting Movements Below the Surface

Food prices were essentially unchanged in January: Even at an annualized rate, the change in the PCE price index for “food and beverages purchased for off-premises consumption” rounds to 0.0 percent.

Among food items, fresh vegetables—which increased at a 32 percent annualized rate—had the biggest impact on January’s headline inflation rate, contributing about 0.1 annualized percentage points.

In last month’s Inflation Update, we wondered whether back-to-back sizable increases in our price index for more-processed food items constituted the start of a trend toward more rapid food price increases. Unfortunately for us as pattern-seekers—though good news for food consumers—January showed a 1.6 percent annualized decline in our more-processed index. The index was weighed down by declines in price for nonalcoholic beverages and beverage materials (coffee, tea, sodas etc.) and “food products not elsewhere classified” (which consists of items like snack foods, canned soups and frozen meals).

Exactly offsetting the decline in the price index for more-processed items was a 4.3 percent annualized increase in our price index for less-processed food items.

Overall food prices are up 1 percent over the past 12 months and an annualized 1.4 percent over the past six months.

Core Goods Prices Bounce Back; Services Prices Remain True to Recent Form

Outside of food and energy, we saw a sharp increase in core goods prices—breaking a several-months-long pattern of declines or small increases—while core services prices registered an increase very much in line with their recent behavior.

Our price index for core goods increased 2.9 percent at an annualized rate in January, its fastest pace since January of 2012. A jump in price for women’s and girls’ clothing—17 percent at an annualized rate—was the main culprit, abetted by significant gains in price for newspapers and periodicals (up an annualized 37 percent), games, toys and hobby items (annualized 22 percent), and men’s and boys’ clothing (annualized 12 percent).

The prices of core goods items, by and large, are quite volatile, so an occasional increase on the order of January’s should not surprise us. Even with January’s robust gain, core goods prices are down an annualized 0.8 percent over the past six months; over the past 12 months, they are down 0.2 percent.

Meanwhile, core services prices—always much smoother—looked in January about the same as they did in December. Our index of core services prices increased 1.4 percent at an annualized rate in January, compared with a 1.5 percent rate in December and a 1.5 percent average over the past six months. Outsized changes in price for various financial services were once again among the biggest-impact components of the index.

Rent, owners’ equivalent rent (OER) and the price of dining out (the index for “other purchased meals”)—three components that combine hefty shares of expenditure and less-volatile price behavior, and hence tend to describe the trend in core services prices—all registered increases in line with their recent past. Rent increased at a 2.7 percent annualized rate in January, versus a 2.8 percent average rate over the past six months. OER posted a 2.2 percent annualized increase in January versus 2.3 percent over the past six months. For dining out, a 1.5 percent annualized increase in January exactly matches the index’s average rate of increase over the past six months.

—Jim Dolmas
March 1, 2013


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