Behind the Numbers: PCE Inflation Update, December 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 rose at a 2.5 percent annualized rate in December, breaking a five-month string of rates below 1.5 percent. Over that span—from July to November—the headline index averaged an annualized 0.7 percent rate of increase. Jumps in the prices of gasoline, airfare and women’s and girls’ clothing contributed to December’s more robust reading. Together these components contributed roughly 2 annualized percentage points to December’s headline inflation rate.
Of course, every month brings a mix of outsized price increases and decreases, and December was no exception—price declines for prescription drugs, nonprofit hospital services, and fresh vegetables made significant negative contributions to December’s headline rate, combining to subtract roughly 0.7 annualized percentage points.
The Dallas Fed’s Trimmed Mean PCE inflation rate—which excludes all outsized price increases and decreases—suggests that underlying PCE inflation in December was considerably more modest than the 2.5 percent headline rate would indicate. The trimmed mean inflation rate for December was an annualized 1.1 percent, the lowest monthly reading since a 0.5 percent annualized decline in April 2013.
The 12-month trimmed mean rate was 1.4 percent in December. Regular readers of the Inflation Update will know that the trimmed mean’s 12-month rate had been steady at 1.3 percent for a considerable number of months in a row. December’s reading didn’t break that streak, though—revisions to earlier data show the streak was snapped in November, at seven consecutive months. November’s 12-month trimmed mean rate is now estimated at 1.4 percent.
The six-month trimmed rate ticked down to an annualized 1.4 percent from 1.6 percent in November. The December six- and 12-month rates for the headline PCE index were 1 and 1.1 percent, respectively.
Consistent with the trimmed mean’s indication that December saw the most modest underlying PCE inflation since last April, the fraction of components in the PCE basket registering price declines in December (47 percent) was nearly identical to the fraction registering declines in April (46 percent). Both months’ figures are high relative to recent experience. Those figures just count the declines among the 178 components that potentially go into the trimmed mean each month, taking no account of differences in components’ expenditure shares. Weighting items by their shares in expenditure, April’s price declines were more broad-based than December’s, with 45 percent of the basket registering declines in April versus 41 percent in December.
Ups and Down Continue for Gasoline Prices
Gasoline prices—adjusted for normal seasonal variation—rose 3.4 percent in December (or an annualized 49 percent rate of increase). That increase almost erases the effect of back-to-back declines in October and November (a cumulative 4.4 percent drop).
Gasoline alone contributed about 1.3 annualized percentage points to December’s headline inflation rate, in the sense that a headline index excluding just gasoline would have risen just 1.2 percent, annualized, rather than the 2.5 percent we actually observed.
Among other energy components, the price of natural gas services fell 0.4 percent in December, while the prices of fuel oil (up 2.4 percent) and electricity services (up 0.4 percent) both rose. The prices for energy goods and services taken as a whole rose 2.2 percent for the month, though they are still up just 0.3 percent for the 12 months ending in December.
Weekly retail price data for gasoline, produced by the Department of Energy, give us an indication of what to expect when PCE data for January are released. Based on the data we have so far, gasoline prices in January are on pace for an increase of 1.4 percent, before seasonal adjustment. Based solely on the normal seasonal pattern in gasoline prices, we would expect a typical January to see a roughly 3.3 percent increase in gasoline prices. A 1.4 percent increase, when the seasonal pattern predicts a 3.3 percent increase, corresponds to a seasonally adjusted decline of 1.9 percent.
Thus, assuming no big surprises in data for the final week of January, we would expect a seasonally adjusted decline of 1.9 percent in gasoline prices to show up in January’s PCE data. Given gasoline’s weight in expenditure—about 3.2 percent of PCE—a 1.9 percent price decline would shave slightly less than 0.1 monthly percentage points (or about 0.7 annualized percentage points) off January’s headline inflation rate.
A Rare Robust Gain in More-Processed Food Items
After several months of small increases and outright declines, our price index for more-processed food items posted a robust 3.5 percent annualized rate of increase in December. This gain is in sharp contrast to the more-processed index’s average behavior over the past six or 12 months; on a six-month basis, the index is down an annualized 0.1 percent, while on a 12-month basis it’s up a mere 0.1 percent. Gains in beverage prices—alcoholic and nonalcoholic—as well as gains in the prices of processed dairy products, processed fruits and vegetables, and “food products not elsewhere classified” contributed to December’s robust reading.
In spite of the large increase in price for more-processed food items, food as a whole increased at just a 1.3 percent annualized rate in December, as prices for less-processed items tumbled for a second consecutive month, falling an annualized 4.1 percent in December. Prices for fresh vegetables, down at a 28 percent annualized rate, had the biggest impact among less-processed items.
For the 12 months ending in December, food prices increased 0.6 percent, reflecting a 2 percent increase in the prices of less-processed items and a 0.1 percent increase in the prices of more-processed items. Measuring changes for the year on a December-to-December basis, 2013’s 0.6 percent increase is the smallest yearly gain in food prices since 2009 (which saw a decline of 1.7 percent). Excluding 2009—which saw sharp declines in price for many commodities—one has to go back to 1976 to find a yearly (December-to-December) increase as small as 2013’s.
Drug Prices Weigh on Core Goods; Services Prices More Robust
Prices for core goods fell sharply again in December, falling at a 2.7 percent annualized rate, after posting a 2.4 percent rate of decline in November. Over the past six and 12 months, our price index for core goods is down an annualized 1.3 percent and 0.9 percent, respectively.
Prescription drugs, down an annualized 9.8 percent in December, were the biggest-impact item among core goods, alone shaving about 0.4 annualized percentage points off December’s headline inflation rate. That 9.8 percent annualized decline is the largest one-month drop in the PCE prescription drug price series, which goes back to 1959. On a 12-month basis, prescription drug prices are up just 0.8 percent. To put that increase in perspective, over the past 20 years, prescription drug prices have averaged an annualized 3.2 percent rate of increase.
Meanwhile, prices for core services rose at a 2.5 percent annualized rate in December, following a 2.4 percent rate of increase in November. Both those readings are above core services’ recent average behavior. Our index of core services prices is up an annualized 2 percent over the past six months and 1.9 percent over the past 12 months.
Declines in the price indexes for nonprofit hospital services (down an annualized 0.8 percent) and “financial services furnished without payment by other depository institutions and regulated investment companies” (down an annualized 5.7 percent) made the biggest negative contributions, among core services, to headline inflation in December. The two components combined for a contribution of –0.3 annualized percentage points, roughly offsetting the 0.4 percentage point contribution from airline services, the biggest positive contribution among core services. The price index for airline services increased 7.5 percent in December at a monthly rate (which is well over 100 percent annualized).
Much more informative, though, than the outsized price movements in any of these volatile components is the behavior of those core services components that combine large expenditure weights and low volatility—that is, the components we’ve taken to calling the “big three”: rent, owners’ equivalent rent (OER), and the price index for “other purchased meals.”
Among these “big three,” the price index for “other purchased meals” (basically, dining out) posted the weakest rate of increase in December, 1.7 percent at an annualized rate. This follows a 2.7 percent rate of increase in November and is below the series’ 12-month rate of 2 percent. The two shelter components, rent and OER, posted more robust rates of increase, a 3.3 percent annualized rate for rent and a 3 percent annualized rate for OER. The two indexes’ 12-month rates each ticked up a tenth of a percentage point in December, rent to 2.9 percent and OER to 2.5 percent.
Our “big three index”—a price index consisting of just these three core services components—increased at an annualized 2.8 percent rate in December and is up 2.5 percent from December 2012.
January 31, 2014