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Behind the Numbers: PCE Inflation Update, August 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 PCE price index increased at a 1.7 percent annualized rate in August. The price indexes for prescription drugs (up at a 9.8 percent annualized rate) and “food products not elsewhere classified” (down at a 12 percent annualized rate) made the largest positive and negative contributions to the August headline inflation rate, adding and subtracting about 0.2 annualized percentage points. Gasoline (for a change) made only a modest contribution, subtracting a bit less than 0.1 annualized percentage points from the August headline rate.

The headline index’s six-month inflation rate fell to an annualized 0.6 percent in August from an annualized 1.2 percent in July. That decline owes less to recent monthly headline rates than it does to a jump in the index seven months earlier, back in February of this year. The 12-month headline rate ticked down to 1.2 percent from 1.3 percent in July.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.6 percent in August, similar to July’s reading of 1.4 percent. The six-month trimmed mean rate came in at an annualized 1.2 percent, down slightly from 1.3 percent in July. The 12-month trimmed mean rate remained steady at 1.3 percent for a fifth straight month. We view the 12-month trimmed mean rate as a good real-time estimate of the underlying trend rate of PCE inflation; that trend rate thus looks to have leveled off at 1.3 percent, after a long period of disinflation beginning around the start of 2012.

As always, our rule-of-thumb forecast for headline PCE inflation over the next 12 months is the current 12-month trimmed mean rate. We thus expect headline PCE inflation to average 1.3 percent over the coming year.

Natural Gas Leads Decline in Prices for Energy Goods and Services in August

As noted above, gasoline made only a modest contribution to August’s headline rate. The price index for gasoline and other motor fuel fell just less than 0.1 percent (at a monthly rate), in line with our expectations in last month’s Inflation Update. The price index for natural gas services (down 2.3 percent from July) was actually the biggest-impact energy item in August, shaving about 0.15 annualized percentage points off the August headline rate.

Among other energy goods and services, the price index for electricity services fell slightly in August (–0.1 percent), while the price index for fuel oil rose modestly (1.2 percent). As a whole, prices for energy goods and services were down about 0.2 percent in August, compared with July, and are down about 0.2 percent over the past 12 months.

Looking ahead to next month’s PCE release, covering September, weekly retail price data from the Department of Energy (DOE) show gasoline prices falling in September, though by less than the normal seasonal decline associated with that month. The DOE data have the price of gasoline on track for a 0.4 percent decline from August, while we would expect a 2 percent decline based on the seasonal pattern. A 0.4 percent decline when a 2 percent decline was expected implies a seasonally adjusted increase of 1.6 percent.

A 1.6 percent increase is a sizable change—remember this number is at a monthly rate—but not extremely so. Over the past three years, about 40 percent of the one-month movements in the PCE price index for gasoline have been smaller in absolute size, and about 60 percent have been larger. Given gasoline’s weight in expenditure—currently around 3.3 percent—a 1.6 percent price increase implies a contribution to next month’s headline inflation rate of about 0.6 percentage points at an annualized rate.

We tend to devote a lot of attention in the Inflation Update to the month-to-month swings in the price of gasoline—whether we’re explaining the current month’s headline inflation rate or trying to get an early read on next month’s release, those short-run movements contain useful information. Occasionally, though, it’s worth stepping back to take a longer-horizon look at the data. What such a longer-horizon perspective on gasoline prices reveals is that, month-to-month swings aside, prices have been on average flat for just over two years: The PCE price index for gasoline and other motor fuel is currently at about the same level as in May 2011. This is not that surprising given that the price of crude oil (Brent crude in particular) has been similarly flat over the same period. Though subject to short-run ups and downs, the price of Brent crude—the oil price most relevant for the price of gasoline—has hovered around $110 per barrel for a little over two years.

Overall Food Prices Up in August; Prices for More-Processed Items Fall Again

Prices for food as a whole rose at a 2.5 percent annualized rate in August. Similar to what we saw in July’s data, underlying the aggregate increase was a sharp rise in prices of less-processed food items (up at a 12.8 percent annualized rate) partly offset by a decline in prices of more-processed food items (down at a 1.2 percent rate).

Sharp increases in the price indexes for fresh vegetables (up at a nearly 46 percent annualized rate) and poultry (up at a nearly 26 percent annualized rate) led the way among less-processed items. Those two components combined to contribute about a quarter of an annualized percentage point to August’s headline inflation rate.

Among more-processed items, “food products not elsewhere classified”—which encompasses snack foods, soups, frozen meals and the like—and sugar and sweets made the most significant negative contributions. The price indexes for both declined at roughly 12 percent annualized rates in August. The two components combined to shave about 0.2 annualized percentage points off the August headline inflation rate, with the bulk of that negative contribution coming from food products not elsewhere classified.

For the 12-month period from August 2012 to August 2013, the price index for food as a whole is up 1.2 percent. Over the same period, our index of less-processed food items is up 3.5 percent and our index of more-processed food items is up just 0.4 percent.

“Big Three” Core Services Post Fastest Monthly Increase in Several Years

Beyond food and energy items, prices of core goods were essentially unchanged in August—falling less than 0.1 percent at an annualized rate—while prices of core services rose at a 2.5 percent annualized rate.

Over the past 12 months, core goods prices are down 0.6 percent, while core services prices are up 1.9 percent. The former is right in line with long-historical averages—for the period from 1994 to 2007, characterized by low and stable inflation, core goods prices declined on average at a rate of about 0.6 percent per year. The 12-month rate of increase in core services prices is low, though, relative to the same historical benchmark—from 1994 to 2007, core services prices averaged a 2.7 percent annualized rate of increase.

August’s negligible movement in core goods prices comes in spite of sharp gains in a couple of relatively large components—prices for prescription drugs (about 3 percent of expenditure) increased at a 9.8 percent annualized rate, and prices for women’s and girls’ clothing (1.5 percent of expenditure) increased at a 12 percent annualized rate. The price index for “clocks, lamps, lighting fixtures and other household decorative items”—down at a 24 percent annualized rate and carrying an expenditure weight of about 0.3 percent—was the biggest-impact item among core goods components falling in price.

Among core services, the price index for the consumption expenditures of nonprofit institutions serving households (up an annualized 10.8 percent), and the price indexes for services provided without explicit fees by commercial banks (up an annualized 22.6 percent) and other regulated depository institutions (up 10.2 percent) combined outsized price increases and large impacts on the headline inflation rate. The three combined to contribute just over 0.4 annualized percentage points to August’s headline inflation rate. The price index for hotels and motels—down an annualized 9 percent—was the biggest-impact item in the negative direction (among core services); it shaved about an annualized percentage point off the August headline inflation rate.

Last, among the “big three” core services—rent, owners’ equivalent rent (OER) and dining out—both shelter components posted robust increases in August. Rent increased at a 4.6 percent annualized rate, while OER increased at a 3 percent annualized rate. For both components, those are the fastest one-month rates of increase since mid- to late 2008. The 12-month rate of increase for rent ticked up to 3 percent in August from 2.8 percent in July; the 12-month rate for OER held steady at 2.2 percent.

The price index for dining out (“other purchased meals”) posted a modest 2 percent annualized rate of increase in August, close to its 12-month rate of 1.9 percent.

Our “big three index”—an aggregate of the three components—increased at a 3.1 percent annualized rate in August. This is the index’s fastest one-month rate of increase since late 2008. One month is, of course, just one month, but these data will bear watching for signs of a sustained pickup. For now, though, the index’s 12-month rate is holding steady at 2.3 percent.

—Jim Dolmas
September 27, 2013


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