Behind the Numbers: PCE Inflation Update, August 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.
The headline PCE price index advanced at a 3.0 percent annualized rate in August, down from a 4.5 percent rate in July, though still a fairly robust pace. Of August’s 3.0 percent, about 0.8 percentage points came from increases in the prices of energy goods and services (mainly gasoline), and about 0.4 percentage points from increases in food prices. Food prices—more precisely, prices for food and beverages purchased for off-premises consumption—posted their sharpest increase since the first quarter of this year.
For the six months ending in August, the headline index is up at an average annualized rate of 2.8 percent, down from 3.2 percent for the six months ending in July. The 12-month headline rate for August was 2.9 percent, a slight increase from July’s 2.8 percent. Based on experience—and barring any unexpected shocks—we expect the 12-month headline rate to gradually come down toward the current 12-month trimmed mean PCE rate, now 1.7 percent.
The core PCE price index rose at a 1.8 percent annualized rate in August, compared with a 2.4 percent annualized rate in July. The smoother trimmed mean suggests underlying PCE inflation neither rose as high in July nor dropped off as noticeably in August as the core would indicate: August’s trimmed mean rate was an annualized 2.1 percent, compared with a 2.2 percent rate in July.
Over the past six months, both core and trimmed mean have averaged rates near 2 percent—the trimmed mean at precisely 2.0 and the core at 2.2 percent. In the 12 months through August, the core is up 1.6 percent, unchanged from July. The 12-month trimmed mean rate of 1.7 percent in August represents a very slight uptick from its value of 1.6 percent in July.
At the risk of becoming repetitive, we’ll repeat our conclusion from last month’s update, that, for the time being, we continue to see the underlying trend rate of PCE inflation as being near 2 percent.
A Modest Contribution from Gasoline (Modest for Gasoline, That Is)
The PCE price index for gasoline and other motor fuels increased 1.7 percent from July to August—not annualized—and alone contributed about 0.7 annualized percentage points to August’s 3.0 percent headline rate. While significant, that contribution is still less than half the size of gasoline’s contribution in July and is, in terms of its absolute size, one of the more modest impacts from gasoline that we’ve seen over the past three years. (Precisely, it ranks 27th out of 36, when the last 36 months’ worth of gasoline effects are ranked from largest in absolute size to smallest. The median impact in absolute size over that period is 1.4 annualized percentage points.)
Perhaps surprisingly, given declines in the price of gasoline at the pump over the past few weeks, gasoline is on track to make a slightly larger positive contribution in September’s PCE data. Based on nearly a full month’s worth of weekly Department of Energy retail price data, the average retail price of a gallon of gasoline in September is on track to be down just 0.9 percent from August. Unfortunately, September is yet another month—like August—that normally features a large seasonal decline in gasoline prices, and the 0.9 percent drop recorded so far is much smaller than the usual decline we expect in September, of about 3.6 percent. That means, in seasonally adjusted terms, the price of gasoline is actually on pace to be up 2.7 percent in September, compared with August.
With a 3.6 percent expenditure weight for gasoline, that 2.7 percent increase—if it holds up as the last of the weekly September data come in—translates into a roughly 0.1 percentage point contribution to headline PCE at a monthly rate, or about 1.2 annualized percentage points.
So, we’ll likely have to live with a positive contribution from gasoline for at least another month. Beyond that, we’re reluctant to hazard a guess. Oil prices—and commodity prices in general—have been on a bit of a rollercoaster ride since early August but have tended to decline over the past four weeks. The price of Brent crude oil looks to be ending the month of September down about $7 per barrel compared with its average over the month. If the oil price simply stays where it is now—about $106 per barrel—the $7 per barrel price decline should eventually translate into a roughly 20 cents per gallon fall in the price of gasoline. That would be about a 5 percent decline, using the average price for September (thus far) as the starting point.
A Further Pickup in Food Price Inflation
Food prices continued to rise in August, with the price index for food and beverages up about 7.5 percent at an annualized rate, its fastest clip since March, when the index posted an 11 percent annualized gain.
More significantly, our index for more-processed food items also increased robustly, at a 7.6 annualized rate, after three months of increases in the 4.0–4.5 percent range. Cereals and “food products not elsewhere classified”—the home of soups, snacks and frozen food—posted notable increases among the more-processed items. (Less-processed food items increased in price at a 7.1 percent annualized rate.)
In the year through August, the index for all food and beverage items is up at an annualized rate of 6.5 percent, our more-processed index is up somewhat less, 5.5 percent, and the less-processed index is up 9 percent.
New Vehicle Prices Finally Reverse Course; Apparel Prices Continue Upward March
Within the core, we continue to see unusually large increases in price among core goods, with core goods prices rising at a 1.8 percent annualized rate in August, following a 2.3 percent rise in July, and an average rate of increase of around 3.2 percent, annualized, for the four months ending in July.
One thing that was different in August’s data was the behavior of new vehicle prices. We have noted extremely robust growth in new vehicle prices in Inflation Updates over the past few months—over the six months ending in July, the PCE price index for new vehicles increased at an annualized rate of 8.3 percent. (By way of comparison, over the 10 years prior to the start of the last recession, new vehicle prices—which incorporate adjustments for improvement in vehicle quality—on average fell at a 0.6 percent annualized rate.)
To the extent those robust price gains reflected a scarcity of supply—the multiple disasters in Japan earlier in the year having disrupted producers’ supply chains—one would expect a reversal to those gains once supply was restored. While one month is—as we often caution—just one month, August may be our first sign of that reversal. The price index for new vehicles—which includes both cars and light trucks, domestic and foreign—fell at an annualized rate of 0.3 percent in August.
What, then, accounts for the strength in core goods prices in August? Primarily, it’s our old friend, apparel, whose extreme behavior we’ve also noted in recent updates. The price index for women’s and girls’ apparel increased at a nearly 30 percent annualized rate in August and alone contributed over 0.4 annualized percentage points to the overall core rate for August. The category also accounted for all the increase in core goods prices in August (in the sense that a core goods index excluding that category would’ve been unchanged in August, rather than up at a 1.8 percent annualized rate).
“Imputed” Prices Have Big Impact on August Core Services Index
The price index for core services increased at a 1.7 percent annualized rate in August, down from a 2.4 percent rate in July, and a bit below its 12-month pace of 1.9 percent.
As with core goods, the big-impact items in core services in August also included some “usual suspects.” Two of those were components of financial services for which no explicit fees or prices are charged, but for which consumers pay in the form of lower returns on their investments. The BEA “imputes” prices for those nonpriced services, and that calculation is sensitive to the behavior of interest rates in the broader economy. The resulting imputed prices tend to be quite volatile. In August, those components combined to shave about 0.4 annualized percentage points off the overall core rate.
The price index for hotels and motels (down 23 percent at an annualized rate) and the price index for airline travel (up 36 percent at an annualized rate) also made large, though largely offsetting, contributions. Like financial services, these two components also tend to show up often in the tails of the distribution of component price increases.
Two components that are almost always toward the middle of the distribution—and hence, components to which we tend to pay close attention—are rent and owners’ equivalent rent (OER). In August, rent grew sharply—4.6 percent at an annualized rate, compared with 3.1 percent in July. OER also posted another healthy increase, 2.6 percent annualized, compared with 3.1 percent a month earlier. Over the past six months, OER has increased at an average annualized rate of 1.7 percent, while rent has increased at an average rate of 2.1 percent.
Little Change in the Distribution of Component Price Changes
Finally, we continue to see about one-third of the overall PCE basket of 178 components falling in price and about two-thirds rising in price. As we have noted before, that’s a pretty normal configuration, if one takes as a benchmark the low-inflation period that began in the early to mid-1990s.
For a second consecutive month, we also have the share of components with prices increasing at a better-than-2-percent rate around 60 percent, when components are weighted by the shares of consumer expenditures. One can see this in the chart of our trimmed mean PCE page.
September 30, 2011