Behind the Numbers: PCE Inflation Update, May 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.
After two straight monthly declines, the headline, or all-items, PCE price index rose in May at an annualized rate of 1 percent. A fall in the price of gasoline (3.4 percent at an annualized rate) was again a drag on the headline index, though not to the same extent as in March or April. Gasoline (and other motor fuel) shaved just under 0.2 annualized percentage points off of May’s headline rate. As regular readers of the Inflation Update will recognize, that’s an unusually modest contribution for the motor fuel category. Not to worry, though—immodesty will return in next month’s release (more on that below).
The biggest single drag on the headline rate in May was not from the typically volatile energy or food categories, but rather the price index for prescription drugs. Down an annualized 7 percent in May, the drug price index shaved about a quarter of an annualized percentage point off May’s headline inflation rate.
The 12-month headline inflation rate, which had dipped to 0.7 percent in April, climbed back to 1 percent in May. The six-month headline rate climbed to an annualized 0.4 percent rate, from an annualized –0.1 percent in April.
The Dallas Fed’s Trimmed Mean PCE inflation rate for May was an annualized 1.3 percent, up from a revised 0.0 percent in April. Based on the original underlying data from the BEA, our trimmed mean had actually posted a negative reading last month (–0.1 percent annualized), which would have been a first for the series. The revised 0.0 percent is not unprecedented, but still quite rare.
The six-month trimmed mean rate inched down to an annualized 1.1 percent in May from 1.2 percent in April. The 12-month trimmed mean rate—which is also our rule-of-thumb forecast for headline inflation over the next 12 months—held steady at 1.3 percent.
The fraction of components in the PCE basket registering price declines remained elevated in May—of the 178 components that potentially go into the trimmed mean, 75 components (or about 42 percent) registered price declines. That’s similar to what we saw in both March and April. On the other hand, when components are weighted by their shares of expenditure, we did see a decline in the falling-price fraction in May, with about 32 percent of the basket registering price declines, compared with 44 percent in April.
Gasoline a Bit Player in May, Should Return to Star Status in June
The PCE price index for gasoline and other motor fuel declined 0.3 percent (at a monthly rate) in May, after posting declines of over 4 percent and over 8 percent in March and April. The index is down 1.8 percent from May 2012.
The price index for energy goods and services as whole—essentially gasoline, fuel oil, electricity and natural gas services—was actually up 0.2 percent in May, as price increases for electricity (up 0.8 percent) and natural gas (2.4 percent) outweighed the modest decline in gasoline and a less modest decline in fuel oil (down 2.9 percent).
Normally, movements in the price of gasoline—given their typically large size and gasoline’s large expenditure share—are the dominant factor moving the index for energy as a whole. While that typical pattern was violated in May, it should be back in force when June PCE data are released. Data on gasoline prices in June—weekly retail price data collected by the Department of Energy—show the price of gasoline on track for a 0.4 percent increase compared with May. That may seem small, but we need to take account of normal seasonal variation in the price of gasoline. The normal seasonal price change for June is, in recent years, a 5.4 percent decline. A 0.4 percent increase when the seasonal pattern is a 5.4 percent decline implies a seasonally adjusted increase of 5.8 percent. And that’s the number that matters for next month’s PCE release.
If that 5.8 percent increase comes to pass—and remember, our price data for June are not quite complete yet—then gasoline alone would end up contributing about 2.5 annualized percentage points to June’s headline inflation rate. That points to a June headline rate—assuming everything apart from gasoline looks similar to this month—between 3.5 and 4 percent, annualized.
Food Prices Decline in May; More-Processed Components a Drag
Prices for food, taken as a whole, declined at a 3 percent annualized rate in May, as a large decline in the prices of more-processed food items (–4.5 percent, annualized) more than offset a modest increase in the prices of less-processed food items (1 percent).
Among more-processed items, the most impactful price declines were in “mineral waters, soft drinks and vegetable juices” (down an annualized 15.8 percent), “food products, not elsewhere classified” (down an annualized 6.5 percent) and bakery products (down an annualized 10 percent). These three components were, in fact, among the biggest-impact items for the headline index in May, with each subtracting about 0.1 annualized percentage points off May’s headline inflation rate.
For the 12 months ending in May, the price index for food as a whole is up 1 percent, combining a 2.9 percent increase in the prices of less-processed food items with a 0.2 percent increase in the prices of more-processed food items.
Prescription Drugs Weigh on Core Goods Inflation
Prices for core goods declined at a 1.1 percent annualized rate in May, in line with their average rate of decline over the past six months (also 1.1 percent). Over the six months prior to that—roughly the last half of 2012—core goods prices fell at an average annualized rate of 0.5 percent. Our index of core goods prices is down 0.8 percent from May 2012.
The biggest-impact item among core goods—and, in fact, the biggest-impact item in May, period—was, as noted above, the price index for prescription drugs. May’s decline (about 7 percent annualized) brings the 12-month rate of change in prescription drug prices to precisely 0 percent, which is unusually low. The last 12-month period to experience zero price inflation for prescription drugs was in 1972–73, and since then there have been only a handful of 12-month periods that even flirted with a zero change. The average rate of increase in prescription drug prices over the past 20 years is about an annualized 3.2 percent.
At the positive end of the spectrum, a rare sharp increase in the price index for televisions (up an annualized 23 percent) added about 0.1 annualized percentage points to May’s headline rate. To give you some feel for how rare such an increase must be, over the past 20 years, the price index for televisions (which is adjusted for improvements in quality) has declined at an average rate of 13 percent per year. May’s gain is not likely to be repeated in June.
Core services, meanwhile, posted a 2.1 percent annualized rate of increase in May, up from an unusually low reading of 0.8 percent in April. Our index of core services prices is up 1.7 percent, annualized, over the past six months, and is also up 1.7 percent over the past 12 months.
Within core services in May, there were really no surprises among the components combining outsized price movements and large impacts on the headline inflation rate: the price index for hotels and motels along with the price indexes for several components within financial services. All of these are on our list of “usual suspects,” items that combine high price volatility with non-negligible expenditure shares.
Prices for Shelter, Dining Out Post Solid Increases
There are, of course, a few components of services that have relatively low price volatility but still produce big impacts because of their significant expenditure shares—namely, rent, owners’ equivalent rent (OER) and the price of dining out. Among these, the performance of OER in May (up an annualized 2.5 percent) was not far from its recent average behavior (an annualized 2.1 percent over the past six or 12 months).
Rent growth, though, was fairly sharp in May, an annualized 3.8 percent rate. That’s a percentage point higher than rent’s average pace over the past six or 12 months and harks back to some of the increases we saw in the second half of last year.
The price index for dining out (formally, “other purchased meals”) increased at a 2.6 percent annualized rate in May, down from a 4.4 percent rate in April. For the three months of March, April and May, the index has increased at an average annualized rate of 3.1 percent, a sharp contrast with the six months prior to March, over which the index for dining out averaged an annualized rate of just 1.3 percent.
Repeating a calculation we made in last month’s update, a price index consisting of just these three items would’ve increased at a 2.8 percent annualized rate in May and would be up 2.3 percent over the past 12 months.
June 27, 2013