Behind the Numbers: PCE Inflation Update, June 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.
The headline, or all-items, PCE price index rose in June at an annualized rate of 4.9 percent, with about half the increase coming from a jump in the price of gasoline and other motor fuel. June’s robust headline inflation rate follows three months of low or negative readings: –1.1 percent in March, –3 percent in April and 1.2 percent in May.
The 12-month headline inflation rate increased to 1.3 percent in June from 1.1 percent in May. The 12-month headline rate had fallen to 0.9 percent in April, its lowest reading since October 2009. The six-month headline rate has rebounded even more sharply, increasing to an annualized 1.2 percent in June from 0.4 percent in May (and a 0 percent reading in April).
The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.1 percent in June, its first monthly reading above 2 percent since March 2012. The six-month trimmed mean rate increased to an annualized 1.4 percent from 1.2 percent in May, while the 12-month trimmed mean rate held steady at 1.3 percent. That marks three months of 1.3 percent readings for the 12-month rate. Given the long, slow slide we’ve witnessed since around the beginning of 2012—when the 12-month trimmed mean rate peaked at 2.1 percent—any indication of leveling off is notable. It would be premature, though, given the evidence of just a few months of data, to pronounce an end to disinflation.
Followers of PCE inflation should also note that this release reflects the results of the Bureau of Economic Analysis’s (BEA) comprehensive revision of the National Income and Product Accounts (the NIPAs). Comprehensive revisions take place every four to five years—the last was in 2009—and may incorporate new definitions and classifications, improved statistical methods and better source data. As a result, some NIPA data may be revised all the way back to 1929.
These revisions affect the BEA’s PCE price indexes and the underlying data that go into the trimmed mean. As a result, comprehensive revisions can potentially affect the entire history of the trimmed mean. Such was the case with this comprehensive revision. So, before diving into our usual analysis of the details of the latest release, we’ll take a quick look at the impact of the revision on the trimmed mean and other PCE inflation measures.
Comprehensive Revision Has Minimal Impact on Trimmed Mean
For PCE measures of inflation—including the headline index and the trimmed mean—the most relevant features of the 2013 comprehensive revision were changes in the BEA’s method for figuring the prices of certain financial services. BEA also incorporated changes in its methods for pricing used vehicles and various forms of household insurance (home, health and auto), but the impact of those changes is minor compared with the changes in the financial service components.
The financial services prices affected by the revision are ones we’ve often encountered in the Inflation Update—they are the prices that BEA “imputes” for services that have no explicit fees. “Free” checking, online bill payment services and the like may have no explicit fees associated with them, but account holders pay for them nonetheless in the form of lower interest rates earned on their deposits. Calculating those implicit costs to consumers is a tricky business, and the changes that the BEA has introduced in this revision—changes to their method of computing reference rates of interest and changes to the scope of bank activities to which the imputations apply—aim to reckon those costs more accurately than was the case with BEA’s prior methods. More detail can be found in this article from the May Survey of Current Business: http://www.bea.gov/scb/pdf/2013/05%20May/0513_nipa-preview.pdf.
Knowing that the comprehensive revision mainly affected those imputed financial services prices, we could reasonably guess that the revision would have only a small impact on the trimmed mean. Why is that? Those financial services prices were—and, after the revision, still are—among the most volatile prices within services. As a result, they have frequently been excluded from the trimmed mean owing to their outsized month-to-month movements. In other words, the revision has mainly affected components that often weren’t included in the trimmed mean anyway.
The data bear this reasoning out. If we compare 12-month trimmed mean inflation rates before and after the revision, the biggest difference (in absolute size) between the pre- and post-revision series is just 0.3 percentage points, and the average difference (again, in absolute size) is just 0.05 percentage points. For the headline PCE index, the biggest absolute difference is 0.8 percentage points, and the average absolute difference is 0.13 percentage points. For the price index for PCE excluding food and energy, the biggest absolute difference is a full percentage point, and the average absolute difference is 0.15 percentage points. (In making these comparisons, we’re using a common sample period, 1978 to the present, dictated by the availability of the trimmed mean.)
So, score one for the trimmed mean. (Truth be told, we’re just thankful this revision was not like the 2009 comprehensive revision. That revision actually reorganized the components into which PCE is broken down, which meant that our computer programs for calculating the trimmed mean had to be completely rewritten to be consistent with the new categories.)
Gasoline Fuels Almost Half of June’s Headline Price Increase
The price index for gasoline (and other motor fuel) increased 6.1 percent in June (not annualized), erasing about half of its decline over the previous three months. Of the 4.9 annualized percentage points making up June’s headline inflation rate, gasoline accounted for about 2.3 percentage points, or just under half.
Other energy components experienced much more modest price movements: fuel oil prices fell 0.5 percent, natural gas prices fell 0.4 percent and electricity prices rose 0.2 percent. The price index for energy goods and services as a whole increased 3.5 percent in June and is up 3.2 percent from June 2012.
Looking ahead to the next PCE release, gasoline is unlikely to play as big a role in July’s headline inflation rate as it did in June’s. We already have complete weekly retail gasoline price data for July from the Department of Energy, and those data show the average price of gasoline falling about 1 percent for the month. After seasonal adjustment—taking into account that a typical July sees a 1.4 percent price decline—we can expect July’s PCE data to show a seasonally adjusted price increase of about 0.4 percent. That’s a very small movement for gasoline; over the past 10 years, the average month-to-month change in the seasonally adjusted gasoline price index, in absolute value, has been a little bigger than 4 percent.
A 0.4 percent increase in the price index for gasoline can be expected to contribute less than 0.2 annualized percentage points to July’s headline inflation rate—which is to say, a very negligible impact.
Food Inflation Mainly a Matter of Chickens and Eggs
Food prices increased at a 3.1 percent annualized rate in June, buoyed by a 6.1 percent rate of increase in prices of less-processed food items. Poultry (up an annualized 12 percent), fresh milk (an annualized 17 percent) and eggs (15 percent) registered particularly sharp increases. Prices for more-processed food items increased at an annualized rate of 2 percent in June.
On a 12-month basis, overall food prices are up 1 percent, prices for less-processed items are up 2.5 percent and prices for more-processed items are up just 0.5 percent. Among all food items, only poultry and eggs seem to have suffered significant price impacts from last year’s drought. The PCE price indexes for poultry and eggs are up 5.5 percent and 6.9 percent, respectively, from June 2012. Over that time, no other food component has increased in price more than 2.6 percent; most have increased much less than that, and many items—all within the more-processed category—have actually fallen in price.
Gains in Core Goods and Services Prices Reflect Outsized Impacts from Several Components
Core goods prices rose at an annualized rate of 2 percent in June, which is quite a robust rate of increase for goods prices. That strength, though, is explained by just a handful of items—jewelry, men’s and women’s clothing, footwear and miscellaneous personal care products. Those components, aggregated into their own index, increased at an annualized rate of nearly 13 percent in June. The rest of core goods, taken as a whole, declined in price at a 0.3 percent annualized rate.
The 12-month inflation rate for core goods ticked up to –0.7 percent in June from –0.8 percent in May. The six-month core goods rate increased to –0.4 percent, annualized, from –1.2 percent.
Meanwhile, our index of core services prices increased at a 2.8 percent annualized rate in June, its fastest monthly pace since October 2012. The price index for financial service charges, fees and commissions—up at a 26 percent annualized rate in June—was the biggest-impact item among core services, contributing about 0.7 annualized percentage points to the core services inflation rate in June (and about 0.4 annualized percentage points to the headline PCE inflation rate).
Core services’ “big three”—rent, owners’ equivalent rent (OER) and the price index for dining out (“other purchased meals”), which together add up to about 30 percent of core services expenditure (and about 20 percent of overall PCE)—all showed more moderate rates of increase in June compared with a month earlier. Rent increased at a 2.5 percent annualized rate, compared with a 3.8 percent rate in May; OER increased at a 2.2 percent annualized rate, versus a 2.5 percent rate in May; and the index for dining out increased at just a 2 percent rate, after posting a 2.6 percent rate in May.
The June rates of increase for OER and dining out are exactly in line with those components’ 12-month rates of increase, while the 2.5 percent annualized rate for rent is a bit below that component’s 12-month pace of 2.9 percent.
A price index consisting of just the “big three” would have increased at a 2.3 percent annualized rate in June and would be up 2.3 percent from June 2012.
August 9, 2013