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Behind the Numbers: PCE Inflation Update, June 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 2.6 percent annualized rate in June, boosted by a sharp jump in the price of gasoline. Up in price by a seasonally adjusted 3.3 percent—or 47 percent at an annualized rate—gasoline accounted for roughly 1.2 annualized percentage points of June’s 2.6 percent headline rate. Food prices were a relative nonfactor in June’s headline inflation as prices for food, taken as whole, were nearly unchanged in June. And, in a reversal of the pattern we’ve seen over the past several months, prices for core goods rose sharply (3.1 percent, annualized), while prices for core services grew very modestly (1.3 percent). Prescription drug prices, up an annualized 12 percent in June, were a main driver of the gain in goods prices and alone contributed about 0.3 annualized percentage points to June’s headline inflation rate.

June’s headline inflation rate follows readings of 2.5 percent in April and 3.2 percent in May. Nevertheless, the 12-month headline inflation rate ticked down to 1.6 percent from a revised 1.7 percent in May. May’s 12-month rate had been initially estimated at 1.8 percent. The six-month headline inflation rate ticked up to an annualized 2 percent from 1.9 percent in May.

The Dallas Fed’s Trimmed Mean PCE inflation rate for June was an annualized 1.8 percent. This comes on the heels of back-to-back readings of 2.5 percent annualized for the two prior months. June’s rate was in line with the trimmed mean’s six- and 12-month rates, an annualized 1.8 percent and 1.7 percent, respectively. The 12-month trimmed mean rate was unchanged from May.

Effects of BEA’s Annual Revision

This release incorporates the results of the annual revision to the national income and product accounts by the Bureau of Economic Analysis (BEA). Because the BEA revised the underlying price and spending data that form the grist of the trimmed mean, the revision affects past values of the trimmed mean as well as past values of the headline inflation rate. This revision affects data going back to 2011, but its impact on both the trimmed mean and headline inflation series is relatively minor. In terms of 12-month inflation rates, the largest effects are felt around mid-2013 and amount to about a 0.1 percentage point difference between pre- and post-revision values. The 12-month trimmed mean and headline rates for June 2013, for example, were both revised from 1.3 percent to 1.4 percent.

The broad patterns in the data since 2011 are unaffected by the revision. Twelve-month trimmed mean inflation still peaks around 2 percent at the start of 2012 and decelerates steadily through early 2013, after which it remains relatively stable, around 1.3 to 1.4 percent, until it picks up in April 2014. Headline inflation shows a similar pattern, albeit with an earlier, higher peak and greater volatility.

Energy Prices Boost Headline Rate in June

The prices for energy goods and services, taken as a whole, increased 1.7 percent in June (not annualized), reflecting increases in the prices of gasoline (3.3 percent) and electricity services (0.2 percent) that more than offset declines in the prices of fuel oil (1.7 percent) and natural gas services (2.6 percent).

Energy goods and services contributed roughly 1 annualized percentage point to June’s headline inflation rate, in the sense that an index of all items other than energy would have increased at a 1.6 percent annualized rate in June, compared with 2.6 percent for all items including energy.

For the 12 months through June, overall energy prices are up 3.1 percent, with gasoline (2.1 percent) posting the smallest increase among the major components. Over the same period, fuel oil prices rose 4 percent, electricity prices 4.2 percent and natural gas prices 5.1 percent.

Looking ahead to energy’s impact on the next PCE release, weekly retail price data from the Department of Energy (DOE) show a modest decline in the price of gasoline in July. The DOE data show the average retail price of gasoline falling 2.1 percent in July. Taking account of the seasonal pattern in gasoline prices—July typically sees a 1.2 percent decline in price—we obtain a seasonally adjusted price decline of 0.9 percent. For a movement in the price of gasoline, a 0.9 percent decline is not particularly large.

Given gasoline’s share in PCE—about 3.2 percent—a 0.9 percent decline in price will translate into a contribution of roughly –0.3 annualized percentage points to July’s headline PCE inflation rate.

Flat Food Prices Break String of Robust Gains

After four months of robust increases ranging from an annualized 3.3 percent to 7.3 percent, food prices finally registered a tame month, increasing at an annualized rate of just 0.2 percent in June—which is to say, prices for food as a whole were nearly unchanged from May to June.

Moreover, negligible price changes were posted for both more-processed and less-processed food items. Our price index for less-processed food items—the main driver of recent overall food price gains—was essentially unchanged in June after increasing at annualized rates of more than 14 percent in each of the prior four months. Our index of more-processed food items rose a negligible 0.3 percent, annualized.

While prices for less-processed and more-processed food items posted similar negligible rates of change in June, the contrast between their average behaviors over either six- and 12-month horizons remains stark.

Over the past six months, our index of less-processed food items is up by an annualized 9.7 percent, while our more-processed index is up just 0.8 percent, annualized. The corresponding increases over the past 12 months are 5.8 percent and 0.3 percent, respectively.

Prices for food taken as a whole are up an annualized 3.3 percent over the past six months and 1.8 percent over the past 12 months.

Core Goods Prices Accelerate, Services Prices Slow

As noted above, June saw something of a reversal in the pattern of price increases across core goods and services that had been in place the prior three months. Over March, April and May, core goods prices averaged an annualized rate of growth of 0.3 percent, while core services prices averaged an annualized 2.7 percent. The healthy growth in core services prices over those three months was a key factor in the recent acceleration of both headline and trimmed mean PCE inflation (for the 12 months prior to March, core services prices rose just 2 percent).

In June, though, core goods prices increased at an annualized rate of 3.3 percent, while core services prices increased at an annualized rate of just 1.3 percent.

In the case of core goods, outsized price movements for a handful of components explain nearly all of June’s acceleration. Prescription drug prices (up an annualized 12.2 percent), women’s and girls’ apparel (9.4 percent) and tobacco (12.8 percent) combined to contribute about 2.8 percentage points to June’s annualized 3.3 percent core goods inflation rate. An index of the other 64 core goods components—our disaggregated data have 67 core goods components in all—would have increased at an annualized rate of just 0.5 percent in June.

Similar outsized movements in a small number of core services components account for some, though not all, of the softness in core services inflation in June. In particular, declines in the PCE price indexes for hotels and motels, the non-fee services of “other depository institutions,” and “financial service charges, fees and commissions” all had noticeable impacts on our core service index in June. Combined, they shaved about 0.7 annualized percentage points off June’s core services inflation rate—an index of prices of core services apart from those three components would have increased at a 2 percent annualized rate in June.

The core services we refer to collectively as the “big three”—rent, owners’ equivalent rent (OER) and the price of dining out—turned in another mixed performance in June, with two of the three picking up compared with May and the third posting a slower rate of increase. Accelerating were rent (up an annualized 4 percent in June versus 3.8 percent in May) and the price of dining out (2.4 percent versus 2 percent). OER, meanwhile, increased at a 2.3 percent annualized rate in June, compared with a 2.7 percent rate in May.

With OER being by far the largest of the three, by expenditure weight, its softer June reading more than offset the pickups in the other two components. Our “big three index,” which aggregates just these three components, increased at a 2.6 percent annualized rate in June, compared with 2.8 percent in May. For the 12 months ending in June, our index is also up 2.6 percent, unchanged from a month earlier.

Over the same 12 months, our index of core services prices is up 2.1 percent, while our index of core goods prices is down 0.3 percent.

—Jim Dolmas
August 8, 2014

 

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