Behind the Numbers: PCE Inflation Update, April 2016
The headline, or all-items, PCE price index increased at a 3.7 percent annualized rate in April, boosted by a sharp increase in the price index for gasoline and other motor fuel. Food prices rose at a 2.3 percent annualized rate, and the conventional core PCE price index—PCE excluding food and energy—rose at a 2.1 percent annualized rate. Core goods prices were essentially unchanged for the month after falling sharply in March, while core services prices rose at a 2.8 percent annualized rate.
The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 2.5 percent in April, which is at the upper end of the range of one-month rates the trimmed mean has recorded over the past several years.
The 12-month trimmed mean rate held steady at 1.8 percent. The 12-month headline rate increased to 1.1 percent from 0.8 percent in March, and the 12-month core rate held steady at 1.6 percent.
Historically, gaps between the 12-month headline and trimmed mean rates tend to be closed by the headline rate converging toward the trimmed mean rate. We, thus, continue to expect a noticeable pickup in the headline inflation rate over the coming year.
Gasoline Prices Boost April Headline Rate
The price index for gasoline and other motor fuel increased 8 percent in April, somewhat faster than we had expected in last month’s inflation update. (We had predicted a 6.1 percent increase.) The gasoline index alone contributed about 1.7 annualized percentage points to April’s headline inflation rate, in the sense that an index of all items other than gasoline would have increased at a 2 percent annualized rate rather than the 3.7 percent rate recorded by the all-items price index.
Gasoline’s April price increase follows a 2.2 percent increase in March. Nevertheless, gasoline prices remain down 11.2 percent from a year earlier.
Among other energy components, the price index for fuel oil increased 1.9 percent, and the price index for natural gas services increased 0.6 percent. The price index for electricity services fell 0.3 percent. Prices for energy goods and services, taken as a whole, rose 3.8 percent in April but remain down 8.1 percent from April 2015.
Weekly retail price data from the Department of Energy (DOE) point to a moderate increase in gasoline prices in May. The DOE data show gasoline prices on track for a 6.2 percent increase in May, but much of that increase reflects seasonal supply-and-demand factors. In recent years, a typical May sees a 4.2 percent increase in prices based on seasonal factors alone. The weekly retail price data, thus, lead us to expect a 2 percent seasonally adjusted increase when PCE data for May are released. A gasoline price increase of that size would contribute about 0.4 annualized percentage points to May’s headline inflation rate or about a quarter of gasoline’s contribution in April.
Prices for More-Processed Food Items Up Sharply
After a sharp drop in March, food prices rose at a moderate 2.3 percent annualized rate in April. Price increases were concentrated in more-processed food items. Our price index for more-processed food items rose at a 4.8 percent annualized rate, its fastest one-month rate of increase since mid-2011.
Prices for less-processed food items fell at a 4 percent annualized rate, compared with a roughly 13 percent annualized drop in March. Among less-processed items, it’s worth noting that egg prices have finally returned to a level last seen prior to 2015’s massive run-up. Egg prices rose nearly 35 percent from April 2015 to August 2015 and have fallen more or less steadily since then. Through March, egg prices were still 4.6 percent above their level of April 2015. The latest drop brings egg prices to 1.9 percent below their level of April 2015.
On a 12-month basis, overall food prices are up a slight 0.1 percent. Over the same period, prices for more-processed items are up 0.8 percent, and prices for less-processed items are down 1.6 percent.
Core Goods Prices Unchanged, Core Services Accelerate
Core goods prices were effectively flat in April, increasing by an annualized 0.1 percent (or by less than 0.01 percent at a monthly rate). Large declines in price for women’s and girls’ clothing and new light trucks were largely offset by sharp increases in price for prescription drugs and jewelry. The 12-month change in core goods prices through April was –0.4 percent, identical to their value in March.
Prices for core services rose at a 2.8 percent annualized rate in April, up from around a 2 percent rate in both February and March, and above core services’ 12-month average rate of 2.3 percent. A few typically volatile components of core services had outsized impacts on April’s headline inflation rate, including the price index for airline services and a handful of financial services components. The former subtracted about 0.15 annualized percentage points from April’s headline rate, while the latter combined to add about 0.3 annualized percentage points.
Our “big three” price index—aggregating the three largest and least volatile components of core services: rent, owners’ equivalent rent (OER) and the price of dining out—rose at a 3.6 percent annualized rate in April, up from a 2.8 percent rate in March. Individually, rent rose at a 4.2 percent annualized rate (its fastest one-month rate since last September), OER at a 3.7 percent annualized rate (also its fastest one-month rate since last September) and dining out (more formally, “other purchased meals”) at a 3.0 percent annualized rate.
For the 12 months through April, the big three index is up 3.2 percent versus 3.1 percent for the 12 months through March.
—Jim Dolmas
May 31, 2016