Behind the Numbers: PCE Inflation Update, January 2011
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.
For a second consecutive month, the headline PCE price index posted an annualized rate of increase in excess of 3.0 percent, coming in at 3.5 percent for January, following an annualized gain of 3.3 percent in December. Energy prices—particularly prices for gasoline and other motor fuel—accounted for much of the month-to-month increase in the index. In contrast to prior months, food prices also made a noticeable contribution to the headline rate in January.
The 12-month headline rate held steady at 1.2 percent. Over the past six months, the headline index has averaged an annualized inflation rate of 2.2 percent, up from an average rate of just 0.4 percent over the first half of last year. The acceleration can be traced primarily to energy prices, which fell at an average annualized rate of 10 percent over the first half of 2010 and have since increased at an average annualized rate of nearly 30 percent.
Core PCE posted a 1.5 percent annualized gain in January, up from a 0.4 percent rate in December. January’s 1.5 percent is the fastest one-month rate of increase in the core since March of last year, when the monthly core readings were, by and large, drifting downward. The 12-month core rate remained at 0.8 percent, while the six-month core rate ticked up from 0.5 percent in December to 0.7 percent in January.
A hefty increase in core goods prices—following an unusually large decline the previous month—helped boost January’s core rate. The trimmed mean PCE inflation rate, which abstracts from outsized movements in component prices, suggested that December’s underlying rate of inflation was not quite as low as indicated by the core and—naturally—suggests January’s rate is not quite as high as indicated by the core. January’s trimmed mean rate was an annualized 1.0 percent, similar to December’s 1.1 percent. The six- and 12-month trimmed mean rates held steady at 1.1 percent and 0.9 percent, respectively.
The uptick in the six-month core rate, while small, at least represents a step in the direction of the trimmed mean, for which the six-month inflation rate has been steadily creeping up, from a low of 0.7 percent in the middle of last year to this month’s 1.1 percent. Other inflation gauges that rely on trimming—like the Cleveland Fed’s median CPI and trimmed mean CPI—have also shown a noticeable upward drift at the six-month horizon.
While the trimmed mean suggests substantial continuity between December’s data and January’s, one feature of the data which is notably different is the number of items registering price declines, which fell to its lowest level since August of 2008.
Gasoline Accounts for Bulk of Headline Increase, More Gains in Pipeline
Energy prices, as noted above, accounted for much of January’s headline inflation rate—in fact, gasoline and other motor fuel accounted for about 1.6 annualized percentage points of January’s 3.5 percent headline rate. The price index for gasoline and other motor fuel increased about 3.9 percent at a monthly rate or roughly 58 percent at an annualized rate in January.
Looking toward data for February, we have three weeks’ worth of weekly retail gasoline price data from the Department of Energy. Those data show gasoline tracking at a month-to-month gain of 2.1 percent compared with January. Given the normal seasonal pattern for February—a roughly 2.4 percent decline—we can expect, based on the data so far, a 4.5 percent monthly rate of increase in the seasonally adjusted index for gasoline when February’s PCE data are released.
The ultimate increase, though, is apt to be higher than our incomplete weekly data for February suggest, since the trajectory of gasoline prices has been sharply upward over the latter half of the month.
Price Gains Robust Across Food Categories
Food price increases have made headlines around the world in recent months, but until now, have not shown up in any significant way in U.S. consumer price indexes. As of the latest PCE release, that pattern might be changing. The index for food—which consists of food and beverages purchased for off-premises consumption—increased at an 8.2 percent annualized rate in January, its fastest rate of increase since July 2008.
Gains were broad-based and, notably, cut across the less-processed/more-processed spectrum to which we’ve often referred in these Inflation Updates. More-processed items are, in some ways, like the “core” of food. They embody more substantial inputs of labor and capital, compared with crude or unprocessed items. And because they often have brand identities, their producers have more market power and face more serious pricing decisions than producers of more “commodity-like” items such as fresh produce or meats.
It’s notable, then, that while prices for more-processed items increased by a smaller amount than prices for less-processed items, gains for both were robust—annualized 14 percent for less-processed items and 6 percent for more-processed items. Data at the more-processed end will bear watching in the coming months for signs of further impact from price increases at cruder stages of processing.
January’s Core Rate Reflects Rapid Growth in Goods Prices
For the past several months, core goods prices have fallen at a rather healthy clip, relative to recent historical patterns, declining at an average annualized rate of about 1.6 percent since last September. This has helped hold down the overall core inflation rate and, likely, contributed to the difference in signals coming from the core and the trimmed mean. As we stated in last month’s Inflation Update, noting the modest pickup in the trimmed mean rate over the past several months, “both the core and trimmed mean suggest that underlying inflation is quite low and is lower now than it was in the middle of 2010. They disagree on whether that trajectory is still pointed downward.”
January’s core goods data break with that pattern—and perhaps illustrate the value of trimming in the process—coming in at an annualized rate of increase of 3.3 percent, the biggest one-month gain since a 3.6 percent rate in September 2009. Apparel prices were the chief culprit: The price index for women’s and girls’ clothing increased at a nearly 20 percent annualized rate and alone contributed about 0.3 annualized percentage points to January’s core rate.
Prices for core services—typically much more stable than goods prices—increased at an annualized 0.8 percent rate in January, in spite of another large gain in the price index for airline services (35 percent at an annualized rate).
Rent and owners’ equivalent rent (OER) remained firm in January, with rent up at a 2 percent annualized rate and OER up at a 1.2 percent annualized rate. The rate of increase in rent was down slightly from November and December’s rates (an average 2.5 percent) but about in the middle of the range we’ve seen since last September, when rent growth began to pick up noticeably.
Number of Falling-Price Components Declines Again, Significantly
Finally, January saw a third straight decline in the number of PCE components registering price declines: 54 of the 178 components that potentially go into the trimmed mean fell in price, or about 30 percent of the basket.
In September 2008, the fraction of components registering price declines increased significantly and (up until now) has remained in a range—centered on 40 percent of the basket—that is high by historical standards. January’s 30 percent is the lowest falling-price fraction since before the jump in September 2008, and it is the first reading since that time to fall into what one might consider a normal range.
February 28, 2011