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Behind the Numbers: PCE Inflation Update, January 2012

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 increased at an annualized rate of 2.2 percent in January, following a 0.8 percent increase in December. January’s rate is above the pace at which the headline rate had been increasing over the prior four months (just a 1 percent rate), though well below the rates we saw over most of 2011.

The six-month headline rate came in at 1.6 percent in January, down from 2.0 percent in December, while the 12-month headline rate ticked down slightly to 2.4 percent from 2.5 percent a month earlier.

The string of moderate headline inflation rates that began in September is certain to be broken when data for February are released, given the large increases in the price of gasoline that have occurred over the month. Based on data collected so far in February, we’re likely to see the largest one-month increase in seasonally adjusted gasoline prices since June 2009.

Core PCE also came in at an annualized 2.2 percent in January, up from a 1.8 percent rate in December, and above the core’s pace over the past six months, which is a 1.5 percent annualized rate. In contrast, the trimmed PCE showed a very slight softening in January (1.5 percent) compared with December (1.8 percent). January’s trimmed mean rate is a bit below that index’s six-month pace of 1.8 percent.

Another point of contrast between the core and trimmed mean lies in the pattern of monthly rates over the past several months. While the monthly core rates have increased in each month since September’s 0.0 percent, the trimmed mean shows little pattern, either up or down. September’s 1.4 percent trimmed mean rate was followed by rates of 1.7, 2.2, 1.8, and now 1.5 percent.

The 12-month rates for both the trimmed mean and core held steady, in agreement at 1.9 percent, identical to December. Note that BEA revisions to data for the prior three months increased slightly the 12-month rates for both the core and trimmed mean—December’s rate had been estimated at 1.8 percent for both indexes.

All in all, based on the recent behavior of the trimmed mean, the underlying trend in PCE inflation looks to be between 1.5 and 2.0 percent, and probably now closer to the upper end of that range than the lower end.

Get Ready for a Really Big Boost from Gasoline Prices

Gasoline prices were not a major factor in January’s headline index, at least relative to the normally wild swings we see in the price of gasoline. On a seasonally adjusted basis, gasoline prices increased 0.9 percent in January (not annualized) and contributed roughly 0.3 annualized percentage points to the headline rate.

Multiply those numbers by about seven to get the impact we’re likely to see when February’s data are released. Based on weekly data collected by the Department of Energy, the price of gasoline in February is on pace for an increase of 6.3 percent compared with January. Given that the typical seasonal pattern has gasoline’s price falling 1.1 percent in February, we should see a roughly 7.4 percent seasonally adjusted increase when PCE data for February come out at the end of March. Gasoline alone will end up contributing about 3 annualized percentage points to February’s headline PCE rate.

Careful readers of the Inflation Update may recall that we had predicted a much bigger boost to January’s headline rate from gasoline than actually transpired. Our best guess last month—using the Department of Energy data—was that January would see a roughly 3 percent increase in the seasonally adjusted price index for gasoline (at a monthly rate), leading to a contribution of about 1.3 annualized percentage points to the January headline rate.  What went wrong with our prediction?

The answer is that the Bureau of Labor Statistics (BLS) rolled out new estimates for the seasonal effects on gasoline prices. Previously, January’s seasonal effect had been estimated to be about zero, as we noted in last month’s Inflation Update. The new estimate is a 2.7 percent increase. So, most of the price increase in the Department of Energy data ended up being accounted for by the seasonal pattern.

This revision by the BLS occurs annually, so we won’t get fooled again—until next January.

Food Price Increases Continue to Taper Off

Food prices increased at just an annualized 1.7 percent rate in January, after increasing at a 2.9 percent rate in December. Over the past six months, the PCE price index for food is up 3.4 percent at an annualized rate.

Declines in price for less-processed food items—led by a nearly 20 percent annualized decline in the price of fresh fruit—were a significant drag on the overall food index. The prices for less-processed items have fallen in three of the past four months.

Our index for more-processed items—which we think is more indicative of the trend in food price inflation—posted a 2.6 percent annualized increase in January. The rate of increase in the more-processed food index hasn’t fallen to the same extent as the less-processed index, but it has definitely slowed over the past several months. In the six months ending last July, the overall, less-processed and more-processed indexes rose by comparable amounts—annualized rates of 5.6, 5.8 and 5.6 percent, respectively. Over the six months since July, those rates are 3.4, 1.5 and 4.2 percent.

The trend is slowing, though less dramatically than would be indicated by the index for food as whole.

Sharp Movements in Prices for Apparel and Health Care Have Large Impacts on the Core

Within the core, January saw a sharp increase in the prices of core goods (3.1 percent annualized) and a rather tame increase in the prices of core services (1.9 percent). This returns us, for at least one month, to the pattern we had over most of the first half of last year, when core goods prices were rising at an almost historically rapid pace.

In January, apparel prices were the main culprit behind the strong showing by core goods. A roughly 17 percent annualized increase in the index for women’s and girls’ clothing contributed on its own nearly 0.3 annualized percentage points to the January core rate.

Among core services, we had some unusually large declines in prices for various medical services. Health care services as a whole recorded a 3.1 percent annualized decline, the component’s largest drop—by a wide margin—since January of 1960. (In fact, there have been only a handful of months that saw a decline of any magnitude.)

Neither of those extreme movements is apt to be repeated next month. Among the more stable elements in the core—where behavior in the recent past is more of a guide to behavior in the near future—we saw a further deceleration in rent growth but a slight pickup in owners’ equivalent rent (OER). Rent increased at a 1.8 percent annualized rate in January, down from a 2.8 percent rate in December. Since posting a 4.6 percent rate last August, the rate of increase in rent has generally drifted downward. January’s 1.8 percent was the first sub-2.0-percent reading for rent growth since last June.

Growth in OER, on the other hand, ticked up to 2.6 percent in January from 2.2 percent in December. In contrast to the general loss of steam for rent, OER has mostly bounced around—a bit above or below an annualized 2.3 percent—over the past six months.

Fraction of Falling-Price Items Steady, Near Normal

Finally, the fraction of components in our PCE basket registering price declines held fairly steady in January—35 percent of the 178 components recorded price declines in January, versus 34 percent in December. Both of those numbers are closer to normal than they are to the elevated levels we saw back in 2010 and again briefly in September and October of 2011. October’s previously recorded 45 percent share, though, has fallen victim to Bureau of Economic Analysis revisions. Based on the revised data, October now shows a still-high 41 percent of the basket falling in price, following a 43 percent falling-price share in September.

—Jim Dolmas
March 1, 2012

 

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