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Behind the Numbers: PCE Inflation Update, January 2014

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 1.2 percent annualized rate in January after rising at a 2 percent annualized rate in December. January’s 1.2 percent rate of increase is exactly in line with the headline index’s six- and 12-month rates.

Price declines for air transportation, nonprofit hospitals, physicians’ services, and men’s and boys’ clothing made noticeable negative contributions to January’s headline inflation rate. Prices for prescriptions drugs—rebounding sharply from an outsized decline in December—and hotels and motels made noticeable positive contributions.

Energy goods and services, on net, contributed positively to January’s headline inflation rate, as a modest decline in the price of gasoline (0.9 percent at a monthly rate) was more than offset by sharp increases in the prices of fuel oil, natural gas and electricity.

As was the case in December, the Dallas Fed’s Trimmed Mean PCE inflation rate for January points to a more modest underlying rate of consumer price inflation than that indicated by the headline PCE index. The trimmed mean inflation rate for January was an annualized 0.6 percent, the lowest monthly reading since a 0.5 percent annualized decline last April.

Given that the trimmed mean excludes all outsized price movements, regardless of the type of good or service, one cannot point to the behavior of any small number of components as explaining January’s very small rate of increase. What one can point to, though, is a large number of price declines in January (when components are weighted by their shares in expenditure). About 42 percent of the PCE basket, weighted by expenditure, declined in price in January—not quite as large as the comparable share for last April (45 percent), but still high compared to the numbers for the intervening months. Between last April and this January, the expenditure-weighted fraction of falling-price components averaged 28 percent of the PCE basket.

The trimmed mean’s six- and 12-month rates both inched down in January, with the six-month rate slowing to an annualized 1.3 percent from an annualized 1.5 percent in December and the 12-month rate ticking down to 1.3 percent from 1.4 percent a month earlier.

Fuel Oil, Electricity, Natural Gas Dominate Energy Prices in January

Given gasoline’s hefty expenditure weight within energy goods and services—it makes up almost 60 percent of the category versus a combined 40 percent for fuel oil, electricity and natural gas—together with gasoline’s typically high price volatility, it’s a rare month when gasoline prices fall but the price index for energy goods and services as a whole rises. January is one such rare month.

On a seasonally adjusted basis, gasoline prices fell roughly 0.9 percent in January (monthly rate), while prices for energy goods and services as a whole increased 0.4 percent. More than offsetting gasoline’s decline were increases in price for fuel oil (up 3.7 percent), natural gas services (up 3.6 percent) and electricity services (up 1.8 percent). For electricity, January’s increase is the largest monthly gain since July 2008. Harsh winter weather no doubt played a role in the sharp price increases for energy goods and services outside of gasoline.

Weekly retail price data for gasoline, produced by the Department of Energy (DOE), give us an indication of what to expect when PCE data for February are released. According to the DOE data, gasoline prices rose in February by 1.2 percent, before seasonal adjustment. This compares with a typical seasonal price increase of roughly 2.9 percent. A 1.2 percent increase, when the seasonal pattern predicts a 2.9 percent increase, corresponds to a seasonally adjusted decline of 1.7 percent, or about twice as deep as January’s dip.

Gasoline contributed about –0.4 annualized percentage points to January’s headline inflation rate, so—based on the DOE data for February—we would expect to see a negative contribution of about twice that size when February’s PCE data are released.

Little Net Change for Food Prices in January

Food prices were essentially unchanged in January, with the PCE price index for food as a whole declining just a quarter of an annualized percentage point. The negligible change in overall food prices masks some large, though offsetting, swings in price for individual components. About 30 percent of food components (weighted by expenditure share) posted annualized price increases of better than 4 percent, and another roughly 30 percent posted annualized price declines of better than –4 percent.

The same pattern of large price swings with only a negligible net effect is present as well in our indexes for more-processed and less-processed food items. Neither index registered a significant change in January; our less-processed index was up an annualized 0.2 percent, while our more-processed index fell an annualized 0.4.

For the 12 months through January, overall food prices are up 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.

Core Goods and Services Both Slow in January

Prices for core goods rose an annualized 0.5 percent in January, their first increase in seven months. A jump in prescription drug prices—which rose an annualized 7.4 percent in January after falling an annualized 9.5 percent in December—contributed significantly to January’s positive core goods reading (and in fact contributed 0.2 annualized percentage points to January’s headline inflation rate).

On either a six- or 12-month basis, though, core goods price declines continue. The six-month rate of change in our index of core goods prices was an annualized –1 percent in January, up from –1.2 percent in December. The index’s 12-month rate of change was also –1 percent in January, down from –0.8 percent in December.

Prices for core services rose a modest 1.3 percent, annualized, in January, down from rates of annualized 2.4 percent in each of the prior two months. Price declines for airline services (down an annualized 46 percent), nonprofit hospitals (down 1.7 percent), and physicians’ services (down 2 percent), contributed to January’s modest rate of increase.

Also a factor in January’s slower rate of increase in core services prices was slower growth in the components we refer to as the “big three”: rent, owners’ equivalent rent (OER), and the price index for “other purchased meals.” Rent rose at an annualized rate of 2.7 percent in January, down from a 3.2 percent annualized rate in December; growth in OER slowed to a 2.5 percent rate, from a 3.1 percent rate in December; and “other purchased meals” slowed to a 1.1 percent rate from a 1.7 percent rate a month earlier. Our big three index—which aggregates these three components—posted a 2.2 percent annualized rate of increase in January, down from a 2.8 percent rate in December. Over the past 12 months, the index is up 2.5 percent.

Core services prices as a whole are up 1.8 percent over the past 12 months. Rates of increase for core goods and core services, on a 12-month basis, are both noticeably below their longer-run average rates. While the 1 percent rate of decline for goods prices over the past 12 months may, at first glance, appear more striking than core services’ 1.8 percent rate of increase, it is the behavior of core services prices that represents the more significant departure from longer-run averages.

Since 1994, our index of core goods prices has averaged an annualized rate of decline of 0.3 percent, while our index of core services prices has averaged an annualized rate of increase of 2.6 percent, so the differences between recent data and longer-term averages are of comparable magnitude (0.7 percentage points for core goods and 0.8 percentage points for core services). But, as a share of expenditure, core services (which add up to about 65 percent of overall PCE) are almost three times as big as core goods (which add up to about 22 percent of PCE). As a consequence, in rough terms, a given percentage point change in the inflation rate for core services has three times the impact on overall PCE inflation as an identical percentage point change in the inflation rate for goods.

—Jim Dolmas
March 3, 2014

 

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