Behind the Numbers: PCE Inflation Update, July 2015
The headline, or all-items, PCE price index rose at a 1 percent annualized rate in July, following stronger rates of 2.8 percent in June and 3.8 percent in May. Slower growth in the prices of energy goods and services and core services account for the bulk of July’s deceleration relative to the prior two months. The conventional core PCE price index—PCE excluding food and energy—rose at just a 0.9 percent annualized rate, after posting a 1.8 percent rate a month earlier.
The 12-month headline rate held steady at a scant 0.3 percent, while the 12-month ex food and energy rate ticked down to 1.2 percent from 1.3 percent in June.
The Dallas Fed’s trimmed mean PCE inflation rate came in slightly higher than either headline or core PCE, recording an annualized 1.3 percent. As with the two official series, though, July’s trimmed mean rate is a step down from the rates posted in prior months. In fact, July’s reading breaks a string of five consecutive months of trimmed mean PCE rates at or above an annualized 2 percent.
After ticking up to 1.7 percent in June, the 12-month trimmed mean rate ticked back down to 1.6 percent in July. The 12-month trimmed mean rate has been either 1.6 or 1.7 percent for sixteen straight months, going back to April 2014.
As usual, our rule-of-thumb forecast for headline inflation over the next 12 months is just the current 12-month trimmed mean rate, so we continue to expect a noticeable pickup in headline PCE inflation over the next year.
Energy Prices Tame in July
After increasing 4.7 percent in May and 1.8 percent in June—not annualized—the PCE price index for energy goods and services rose just 0.1 percent in July. Gasoline prices rose 0.8 percent, but the other major energy components were uniformly down—fuel oil by 3.4 percent, natural gas services by 1.4 percent, and electricity services by 0.4 percent.
Given the relative weights of these components in PCE, the modest decline in electricity prices actually had a bigger impact on headline inflation than the larger declines in the prices of fuel oil and natural gas. Electricity shaved roughly 0.1 annualized percentage points off July’s headline rate, offsetting about half of gasoline’s roughly 0.2 percentage point positive contribution.
Given recent price declines, gasoline is likely to swing from a small positive contribution in July to a small negative contribution in August. Weekly data from the Department of Energy show gasoline prices on track for a roughly 4.2 percent decline in August. A typical August sees a 1.4 percent decline just from seasonal factors—changes in driving habits, refinery activity and the like—implying a 2.8 percent seasonally adjusted decline in gasoline prices.
If this expectation is realized, gasoline would subtract a bit under 0.1 percentage points, at a monthly rate, or about 0.7 annualized percentage points, from August’s headline PCE inflation rate.
From mid-July to mid-August, the price of Brent crude oil, the main determinant of gasoline prices, fell by about $12.50 per barrel, a roughly 22 percent drop. Using the rough rule of thumb that every $10 per barrel drop in oil prices corresponds to a 25 cents per gallon drop in average gasoline prices, gasoline prices—if they had fully incorporated the drop in the price of crude—should have fallen about 30 cents per gallon from mid-July to mid-August. In fact, the decline was about 12 cents per gallon, suggesting gasoline prices have further to fall, assuming crude oil prices remain at current low levels.
Food Prices Up, Led by More-Processed Items
Food prices rose at a 2.6 percent annualized rate in July, following a 3.5 percent rate of increase in June. In contrast to June—where a whopping 18 percent increase in the price of eggs fueled most of the gain in the overall food index—July’s increase in food prices owed more to the behavior of more-processed food items.
Our index of prices of less-processed food items (which includes eggs) was up at an annualized rate of just 1.9 percent, while our price index for more-processed items rose at a 2.9 percent annualized rate. The corresponding numbers for July were a 9.2 percent annualized rate for less-processed items and a 1.3 percent rate for more-processed items. To be sure, eggs still posted a healthy 3.3 percent increase for the month (not annualized) and are up 25 percent from a year ago.
On a 12-month basis, prices for food as a whole are up 0.9 percent, reflecting a 0.2 percent price increase for less-processed items and a 1.3 percent increase for more-processed items.
Core Service Prices Slow in July
Core goods prices declined in July at 1.5 percent annualized rate, similar to their rate of decline in June. The rate of decline over both months is somewhat faster than the pace core goods have posted over the past 12 months, a 0.8 percent rate of decline. That 12-month rate is just slightly steeper than core goods’ longer-run average rate of decline, which is about 0.5 percent per year.
Big-impact items among core goods—those items whose combination of large price swings and expenditure shares translated into big contributions to the headline inflation rate—included motorcycles and apparel for both sexes. Motorcycles (down an annualized 66 percent) and men’s and boys’ clothing (down an annualized 13 percent) combined to subtract about a quarter of an annualized percentage point from July’s headline rate. Women’s and girls’ clothing (up an annualized 9.7 percent) added about 0.1 annualized percentage point to the headline rate.
While core goods’ July reading was basically a repeat performance of June’s, core services prices grew at a noticeably slower rate compared with a month earlier. Our index of core services prices was up at an annualized rate of 1.7 percent in July versus a 2.9 percent rate in June.
Among very broad categories of core services, recreation, financial services, communication, education and personal care services all experienced notable decelerations from a month earlier.
At the same time, our “big three” core services index—aggregating rent, owners’ equivalent rent (OER), and the price index for “other purchased meals”—posted another healthy increase, rising at a 3.4 percent annualized rate in July. This follows a 3.9 percent rate of increase in June.
Rent increased at a 4.1 percent annualized rate and is up 3.6 percent for the 12 months ending in July. OER increased at a 3.5 percent annualized rate in July, down from a 4.4 percent rate in June. Nevertheless, OER’s 12-month rate of increase ticked up to 3 percent from 2.9 percent a month earlier. And other purchased meals—basically the price index for dining out—increased at a 2.5 percent annualized rate, up from a 2 percent rate in June. That index is up 2.9 percent on a 12-month basis.
The 12-month rate for the big three index itself came in at 3.1 percent in July, unchanged from June.
—Jim Dolmas
August 28, 2015