Behind the Numbers: PCE Inflation Update, April 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.
Headline PCE inflation slowed slightly in April, while both the core PCE and trimmed mean PCE indexes picked up a bit of steam.
Headline PCE inflation came in at an annualized rate of 4.1 percent in April, compared with rates of 5.0 percent and 4.7 percent in February and March. Strong energy price increases—particularly for gasoline—again made the biggest contribution to the month’s headline rate. That’s a pattern we’ve seen now for five straight months (and eight of the past nine, November 2010 being an exception). We’re almost sure to see a reversal of the pattern when May’s PCE data come out and, perhaps, beyond May, so long as crude oil prices remain off their recent highs.
The trimmed mean posted a 2.4 percent annualized rate in April, its fastest one-month pace since October 2009, while the core PCE index increased at a 2.2 percent annualized rate. With each month’s worth of fresh data, it seems apparent that the rates of increase for both the trimmed mean and core have picked up in 2011. Over the first four months of the year, the trimmed mean and core have recorded average annualized rates of 2.0 percent and 1.9 percent, respectively. Over 2010, the two indexes averaged rates of just 0.8 percent and 0.7 percent.
Underlying the pickup in all three of these inflation gauges—headline, trimmed mean and core—is a fairly noticeable shift in the distribution of price increases for all of the various components that go into the PCE. For the past few months, we’ve noted in these Inflation Updates that the fraction of PCE components registering price declines has fallen from an elevated level to something much more normal. What’s been going on among the components registering increases in price? When components are weighted by their shares of consumer expenditure, prices for over half the PCE basket increased at a rate faster than an annualized 2.0 percent in April.
Gasoline’s Boost Likely to Become a Drag
Over the first four months of 2011, the headline PCE price index has averaged an annualized rate of increase of 4.5 percent. Over the past 20 years, we’ve seen only a few episodes of four-month headline inflation higher than 4.5 percent—mid-2008, late 2007 and the autumn of 2005 (in the wake of hurricanes Katrina and Rita).
Gasoline price increases have been a major contributor to the recent behavior of the headline price increase. For the first four months of 2011, the rest of the PCE basket apart from gasoline has averaged an annualized rate of increase of 2.6 percent—not quite “tame,” but nevertheless a threshold more frequently breached over the past 20 years than the 4.5 percent described in the previous paragraph.
Crude oil prices have fallen substantially since the end of April—Brent crude is now selling for around $115 per barrel, compared with a recent high of around $126 per barrel at the end of April, which represents a decline of nearly 9 percent. If crude prices remain off their recent highs, gasoline prices are apt to come down as well. Indeed, we’ve begun to see some of that in the Department of Energy gasoline price data that we regularly refer to here in the Inflation Update.
With four weeks’ worth of May data in hand, the average retail price of a gallon of gasoline is on track for an increase of 3.6 percent (at a monthly rate) compared with April. Taking account of the normal seasonal pattern in gasoline prices—May usually features a hefty increase of about 5.6 percent—that 3.6 percent increase actually points to a fairly sharp drop of 2 percent in the seasonally adjusted data that’s relevant for May’s PCE release. That would be the first decline we’ve seen in the PCE’s gasoline component since June 2010, and it would be expected to shave about 0.9 annualized percentage points off May’s headline rate. If, apart from gasoline, every aspect of May’s PCE data were identical to April’s, we’d get an annualized headline rate of around 1.7 percent.
Food Price Increases Slow Slightly in April
Food prices in the PCE increased at an annualized rate of 5.4 percent in April, a robust pace to be sure, but down from a 10.7 percent rate in March and a 9.5 percent average rate over January, February and March.
Is food price inflation tapering off? I would not uncork the champagne yet. Significantly, the easing in food’s rate of increase in April owes much to a very tame 1.2 percent rate of increase for items at the less-processed end of the spectrum. Price changes for the less-processed components are quite volatile, and—as we have often argued in the Inflation Update—probably less informative about underlying trends in food price inflation than prices at the more-processed end of the spectrum. There, we saw a whopping 7.0 percent annualized rate of increase in April.
The price index for dining out in the PCE is—appropriately—counted among core services, rather than food, and is not included in our more- or less-processed indexes referenced above. Nevertheless, conceptually it’s something like the limiting case, or endpoint, of the processing spectrum—food just doesn’t get any more processed than a meal at a restaurant. Rates of increase for this component have been climbing as well, coming in at an annualized 4.6 percent in April after posting an annualized 3.8 percent in March. April’s 4.6 percent is the fastest one-month rate of increase since October 2008.
Big-Impact Items in the Core
As noted above, core PCE increased at a 2.2 percent annualized rate in April. That rate reflects increases of annualized 3.1 percent for core goods and 1.9 percent for core services. Goods prices are typically volatile, and April’s 3.1 percent rate for core goods reflects some outsized increases in prices for jewelry, prescription drugs and motor vehicles.
The components of core services are typically more stable, but even here some components—especially airline transportation (which inherits some volatility from energy prices) and some financial services—have price volatility greater than that of the typical core good. April saw a sharp decline in the price index for airline transportation—20 percent at an annualized rate—breaking a string of six sharp monthly increases. That decline shaved about 0.1 annualized percentage points off the April core rate. Larger—though largely offsetting—contributions came from two financial service components, “financial service charges, fees and commissions,” which registered an 11 percent annualized increase, and the price index for commercial bank services, which registered a 19 percent annualized rate of decline. Given the expenditure shares for those two components, they added and subtracted about a quarter of an annualized percentage point from the April core rate.
Trimmed Mean Points to Increase in Trend Inflation
One can always argue that the core rate would’ve been higher (or lower) were it not for items X, Y and Z, but that’s a highly subjective exercise (what about U, V and W?). The trimmed mean tries to eliminate the effects of unusually large price increases or decreases in an objective way, excluding fixed fractions of the biggest increases and decreases every month. And the signals coming from the trimmed mean of late are quite clear—not only is the average rate thus far for 2011 well above that for 2010, but the lowest monthly reading (last month’s annualized 1.5 percent) is above every monthly reading for 2010 (in fact, above every reading back to November 2009). The underlying trend rate of PCE inflation has, it appears, ratcheted up from something below 1.0 percent to something in the range of 1.5–2.0 percent.
A Shift in the Distribution of Price Increases
Finally, in the last few Inflation Updates, we noted that the fraction of components registering price declines each month had come down from the very elevated levels we had seen starting from the end of 2008. That trend continued in April, with just 29 percent of the 178 components in our basket registering declines.
Our focus on the fraction of falling-price components came about at a time of concern over the possibility of deflation. As that concern has dissipated, it’s natural to shift attention to what’s going on at the other end of the price spectrum.
Our trimmed mean PCE webpage (www.dallasfed.org/data/pce/index.html) includes a nice chart that summarizes, to some extent, the evolution over time in the distribution of component price increases. In contrast to the fraction of falling-price components that we report every month here in the Inflation Update, the chart plots the fractions of components with price increases in various ranges—zero to 2 percent, 2 to 3 percent, and so forth. The fractions in the chart are based on expenditure shares—an item that accounts for 5 percent of expenditure, and whose price rises in a particular month, will account for 5 percentage points of the height of the chart for that month.
I point this chart out because, in two of the past three months, the share of components experiencing price increases at a better-than-2-percent rate has topped 50 percent (and has been at least near 50 percent in three of the past four months). While we had one month like that in the recent past—a spike in August 2010—the numbers for the past few months, taken in the context provided by the chart, seem not so fluky, and more like the culmination, or continuation, of a trend that began sometime around November of 2010.
These are data that, admittedly, we’ve not paid a great deal of attention to here in the Inflation Update. You can expect to see a bit more focus on them in coming months.
May 27, 2011