Behind the Numbers: PCE Inflation Update, November 2010
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.
After one of the tamest inflation months in recent memory—with the core PCE price index and the trimmed mean registering essentially zero inflation rates in October—both measures of underlying inflation bounced back to somewhat firmer levels in November. The core posted a 1.0 percent annualized rate in November, while the trimmed mean came in at an annualized 1.4 percent. The 12-month rates for each held steady at 0.8 percent.
Over the past several months, sharp increases in energy prices, gasoline especially, have tended to boost headline PCE inflation rates above both the core and trimmed mean rates. In fact, from July through October, monthly headline rates exceeded the corresponding core rates by an average 1.5 annualized percentage points. November saw a break from this pattern, as the prices for energy goods and services, taken as a whole, increased at a relatively modest 2.2 percent annualized rate. November’s headline rate—an annualized 1.1 percent—was thus not far off the November core rate. The 12-month headline ticked down to 1.0 percent, from 1.2 percent in October.
Last month, in our summing up of the very weak October data, we cautioned against making too much of any one month’s data and noted that it would take patterns sustained over several months to get us to revise our view of the underlying trend in inflation. The November core and trimmed mean data—which are more in line with the data for the months prior to October—tend to reinforce the view we’ve held now for the past several months, that the underlying trend in inflation remains stable, albeit at an extremely low level.
Energy’s Contribution Modest in November; Expect a Much Bigger Boost in Next Month’s Data
As noted above, rising energy prices—particularly for gasoline—gave a significant boost to headline inflation rates from July to October. This is not the case in November. November’s data combine a smaller increase in the price of gasoline, compared with those prior months, and a sharp decline in the price index for natural gas. The price index for gasoline increased just 0.7 percent in November (at a monthly rate, which translates to about 8.5 percent at an annualized rate), while the index for natural gas tumbled 5.7 percent (or an annualized rate of about –50 percent).
Barring some very large declines in the nongasoline components of energy goods and services, December’s data should see a return to the July–October pattern.
With three weeks’ worth of data, the Department of Energy’s weekly survey of average retail gas prices shows December gasoline tracking at about a gain of 4.2 percent compared with November. That’s a monthly rate, and before seasonal adjustment. The normal seasonal pattern calls for a roughly 3.7 percent decline in December. (The estimated December seasonal effect has been a little unstable in recent years; –3.7 percent is the average of the past three Decembers.) A 4.2 percent increase, when a 3.7 percent decline is expected, means a seasonally adjusted increase of 7.9 percent. If the trend in the weekly numbers holds up through the end of the month, December would thus see the largest one-month, seasonally adjusted jump in gasoline prices since June 2009.
In that case, gasoline alone would end up contributing almost 3.0 annualized percentage points to December’s annualized headline rate. To put it differently, if the November-to-December price change for every other item matches the item’s October-to-November change, but gasoline increases 7.9 percent, December’s headline rate will end up at an annualized 3.9 percent, compared with November’s annualized 1.1 percent.
Prices for More-Processed Food Items Rebound After Slipping in October
Prices for food (and beverages) purchased for off-premises consumption increased at an annualized 1.3 percent rate in November, compared with a 0.8 percent rate in October. For the 12 months ending in November, the food index is up 1.3 percent.
Prices for less-processed food items were close to unchanged in November, falling a negligible 0.1 percent at an annualized rate. Prices for items at the more-processed end of the food spectrum rose at a solid 1.8 percent annualized rate in November, after dipping slightly in October. The October drop broke a three-month string of fairly solid gains (just under an annualized 2.0 percent, on average).
Given that we view the price behavior for more-processed food items as informative about underlying trend inflation, we generally check whether that behavior corroborates or contradicts what we see in core PCE. As was the case with the core, the behavior of prices for more-processed food items in November looks more like the data we saw in July, August and September than it does the data for October.
Big-Impact Items in the Core
As noted above, the core PCE price index increased at an annualized 1.0 percent rate in November, compared with an essentially zero rate in October. Underlying November’s 1.0 percent were a 1.0 percent annualized rate of decline in prices of core goods and a 1.7 percent annualized rate of increase in prices of core services. Neither of those rates is too different from core goods’ and core services’ respective 12-month rates, –0.8 percent for goods and 1.4 percent for services.
Among core goods, jewelry—which tends to follow the price of gold—made the most significant positive contribution, adding nearly 0.2 annualized percentage points to the November core rate, while “dishes and flatware” and “games, toys and hobbies” made the most significant negative contributions. Those two components together combined to shave about 0.4 annualized percentage points off the November core rate.
Among core services, the volatile index for hotels and motels, which fell 17 percent at an annualized rate in November, made the most significant negative contribution (about –0.1 annualized percentage points). After posting a sharply negative rate in October—an annualized –8.9 percent—the index for the services of nonprofit hospitals rebounded to a trend-like 4.1 percent annualized rate of increase in November. This component made the most significant positive contribution among core services, adding about 0.2 annualized percentage points to November’s core rate.
A Pick-Up in Rent Growth
Given their hefty weights in the PCE basket, rent and owners’ equivalent rent (OER) invariably have a large impact on core inflation. And, because they are among the least-volatile PCE components, whatever they happen to be doing at the moment—rising or falling, accelerating or decelerating—is generally a good indication of what they’ll be doing over the near future.
With that in mind, it’s encouraging to see that both components continued to increase in November. Growth in rent, moreover, picked up from a 0.7 percent annualized rate in October to a 2.6 percent rate in November—its fastest one-month pace since January 2009. OER, which tends to follow rent, increased at a 1.4 percent annualized rate in November, up from a 1.0 percent rate in October.
On a 12-month basis, rent is up 0.6 percent (compared with 0.3 percent in October), while OER is up 0.2 percent (its first positive 12-month rate since February of this year).
As long as growth in rent and OER—what one might call the “fat middle” of the distribution of core prices each month—continues to pick up, that will be a strong force working against any further slowing in the core rate.
Number of Falling-Price Components Down From Record High
In October, the number of falling-price components—out of the 178 components we keep track of to construct the trimmed mean—set a record for our data, with nearly half of the components registering price declines.
The number of falling-price components retreated in November: 64 components, or about 36 percent of the 178 total, fell in price. Since October 2008—when we first saw a significant jump in the number of falling-price components—the fraction of components registering price declines each month has averaged about 39 percent. From January 1994 to September 2008—a period during which inflation was fairly low and stable—the fraction of falling-price components averaged about 32 percent. So, November’s number is about midway between the averages over those two periods—not quite as high as most of the post-October 2008 readings, but not so low as to be typical of the earlier period either.
December 23, 2010