Behind the Numbers: PCE Inflation Update, May 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, or all-items, PCE price index rose at a 2.8 percent annualized rate in May, after increasing at annualized rates of 2.4 percent in April and 2.3 percent in March. This string of readings above 2 percent contrasts noticeably with headline rates over the months prior to March. For the six months ending in February, headline PCE inflation averaged an annualized 1.1 percent. For the 12 months ending in February, headline PCE inflation was just 0.8 percent.
As was the case in April, some of the strength in May’s headline rate came from volatile food and energy prices. The PCE price index for food increased at a 7.3 percent annualized rate in May, while the prices of energy goods and services, taken as a whole, increased at a 10.3 percent annualized rate. But—also similar to April—food and energy prices alone do not account for May’s robust headline rate. Prices for core services rose at a 2.6 percent annualized rate in May after increasing at rates of 2.7 percent rate in April and 2.9 percent in March.
The Dallas Fed’s Trimmed Mean PCE inflation rate continues to indicate a faster pace of underlying consumer price inflation over the past few months. The trimmed mean inflation rate for May was an annualized 2.5 percent, identical to April’s reading, and well above average rates over the prior six or 12 months.
Twelve-month headline and trimmed mean rates continued to move up in May. The 12-month headline rate increased to 1.8 percent from 1.6 percent in April, while the 12-month trimmed mean rate ticked up to 1.7 percent from 1.6 percent.
As we regularly note in the Inflation Update, our own rule-of-thumb forecast for headline PCE inflation over the coming 12 months is just the current 12-month trimmed mean rate. We thus expect headline PCE inflation to average 1.7 percent over the next 12 months, little different from its current 12-month rate.
Electricity Dominates Energy in May
As noted above, prices for energy goods and services, taken together, rose sharply in May. The overall increase—0.8 percent at a monthly rate—reflects increases in the prices of electricity services and gasoline that more than offset declines in the prices of fuel oil and natural gas services.
The price of electricity services, up 2.3 percent at a monthly rate, had the largest impact of any item on May’s headline inflation rate, contributing about 0.4 annualized percentage points. Gasoline prices rose 0.8 percent, while prices for fuel oil and natural gas fell 1.4 percent and 1.7 percent, respectively. In terms of impact on headline inflation, the movements in gasoline, fuel oil and natural gas were roughly mutually offsetting. Energy as a whole contributed about 0.4 annualized percentage points to May’s headline inflation rate.
Looking ahead, weekly gasoline price data from the Department of Energy (DOE) point to a much larger impact from energy prices when PCE data for June are released. The DOE data show gasoline prices in June on track for a roughly 0.4 percent increase from May, before seasonal adjustment. The typical seasonal pattern in gasoline prices calls for a sharp 2.9 percent decline in June. A 0.4 percent increase when the normal seasonal pattern is a 2.9 percent decline translates into a seasonally adjusted price increase of 3.3 percent. Assuming it comes to pass, a 3.3 percent increase in seasonally adjusted gasoline prices would be about four times the size of the 0.8 percent increase we saw in May’s data. Gasoline’s contribution to headline inflation in May was about 0.2 annualized percentage points, so we would expect a contribution on the order of 0.8 annualized percentage points in June’s PCE numbers.
Food Prices Continue to Surge
May saw a fourth consecutive month of large food price increases, led again by sharp increases in the prices of less-processed food items. Prices for food as a whole were up at an annualized rate of 7.3 percent in May, while our price index for less-processed food items increased at a 17.7 percent annualized rate. Fresh vegetables (up at a 36.5 percent annualized rate), poultry (a 20.4 percent rate) and pork (a 32.4 percent rate)—all part of our less-processed food index—had the biggest impacts among food components on May’s headline inflation rate.
In contrast to April, May also saw a healthy increase in our price index for more-processed food items. The index increased at a 3.5 percent annualized rate in May, after being essentially unchanged in April.
Since food price inflation first accelerated (back in February), overall food prices have risen at an average annualized rate of 4.9 percent. Over the same span, monthly gains in our indexes of prices for less-processed and more-processed food items have averaged annualized rates of 14.8 percent and 1.3 percent, respectively.
Rent Growth Remains Robust
Outside of food and energy, prices for core goods and services basically repeated their performance from April—core goods prices rose at an annualized rate of 0.4 percent in May (versus 0.6 percent in April), while core services prices rose at an annualized rate of 2.6 percent (versus 2.7 percent in April).
As usual, core goods prices—typically volatile—contained a mix of outsized increases and decreases in May. Prescription drug prices, up at an 8.6 percent annualized rate, made the biggest positive impact on headline inflation, contributing nearly 0.2 annualized percentage points to May’s headline inflation rate. The PCE price index for dishes and flatware, down at a nearly 33 percent annualized rate, made the biggest negative contribution, subtracting about 0.1 annualized percentage points from May’s headline inflation rate.
Among core services, the price index for hotels and motels, up at a 34.3 percent annualized rate, made the biggest positive contribution to headline inflation in May, adding about 0.2 annualized percentage points to May’s headline rate. Communication services—which combine phone services, mail and delivery services, and Internet access—made the biggest negative contribution among core services, shaving a bit less than 0.1 annualized percentage points from May’s headline rate.
Movements in rent, owners’ equivalent rent (OER) and the price index for dining out—the items we have taken to calling the “big three” here in the Inflation Update—were slightly mixed in May. The price index for dining out (more formally, “other purchased meals”) decelerated to a 2.1 percent annualized rate of increase in May after three months of rates in excess of 3 percent. Rent and OER, meanwhile, continued to post fairly robust rates of increase. Rent increased at a 3.8 percent annualized rate in May, while OER registered a 2.8 percent annualized rate. On a 12-month basis, rent is up 3.1 percent, OER is up 2.6 percent and the price index for other purchased meals is up 2.2 percent.
Our big three index—which aggregates rent, OER and the price of dining out—increased at a 2.8 percent annualized rate in May, similar to April’s 2.9 percent rate. The index’s 12-month rate held steady at 2.6 percent.
June 26, 2014