Behind the Numbers: PCE Inflation Update, February 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.
Fueled by a hefty increase in the price of gasoline, the headline PCE price index increased at an annualized rate of 3.8 percent in February, its largest one-month gain since July of last year. Gasoline alone accounted for about 2.5 of the 3.8 percentage points.
In spite of February’s sharp increase, the six-month headline rate held steady at 1.7 percent, while the index’s 12-month rate inched down to 2.3 percent from 2.4 percent a month earlier.
Below the surface of February’s robust headline rate, both core PCE and the Dallas Fed’s trimmed mean posted only modest increases. February’s core rate was an annualized 1.6 percent, down from 2.7 percent a month earlier. That deceleration breaks a string of four straight months in which each successive core reading was higher than the month before. The more stable trimmed mean decelerated less dramatically in February, coming in at a 1.4 percent rate, compared with a 1.8 percent rate in each of the prior two months.
On either a six- or 12-month basis, the core and trimmed mean are singing a very similar tune. The 12-month rates for both are holding steady at 1.9 percent—three straight months for the core, four straight months for the trimmed mean. The six-month rates for both ticked down one tenth of a percentage point in February, to 1.5 percent for the core and to 1.7 percent for the trimmed mean. Six months earlier—last August—those rates stood at 2.3 percent and 2.0 percent respectively.
While the run-up in gasoline prices driving the headline rate is certainly an unwelcome development for consumers, our measures of the underlying trend in PCE inflation—whether the core or the trimmed mean—indicate that underlying inflation is, at the very least, steady, if not slightly decelerating.
A Tale of Two Gases
If gasoline prices rose for a full 12 months at their February rate, they would double within a year. That rate, a seasonally adjusted 6 percent on a monthly basis or about 100 percent on an annualized basis, was the highest we’ve seen since December of 2010.
Looking at energy more broadly, consumers did get some relief owing to lower natural gas prices, but the offset—both in terms of consumers’ pocketbooks and the headline PCE price index—was relatively minor. The PCE price index for natural gas services declined at a roughly 33 percent annualized rate in February—about a third of the absolute size of gasoline’s increase. On top of the difference in the price changes, there is also a large disparity in expenditure shares of gasoline and natural gas—consumer spending on gasoline is about nine times larger. February’s sharp drop in the price of natural gas subtracted a little less than 0.2 annualized percentage points from February’s headline PCE rate—enough to make natural gas one of the biggest-impact items in February, but still small compared to gasoline’s 2.5 percentage points.
On a six-month basis, though, the offset from natural gas prices is a bit more sizeable. While gasoline price increases (about 9 percent annualized) have contributed just over a quarter of an annualized percentage point to the six-month headline rate, natural gas price declines (about 20 percent annualized) have subtracted roughly a tenth of a percentage point.
Looking ahead to March’s PCE numbers, we can expect a much smaller impact from gasoline when those data become available. Based on weekly Department of Energy data, gasoline prices have risen sharply in March—at about a 7.4 percent monthly rate. Much of that increase, though, reflects typical seasonal patterns. The weekly data show gasoline prices on pace for a seasonally adjusted increase of about 0.8 percent in March.
Less-Processed Items Pull Down Food Index
Food prices were close to unchanged in February, declining by an annualized 0.2 percent. This follows a moderate 1.7 percent annualized increase in January. Price declines, though, were concentrated in the more volatile less-processed food categories, fresh produce in particular. Our price index for less-processed food items fell at a nearly 9 percent annualized rate in February and has declined in four of the past five months. On a six-month basis, the less-processed index is down an annualized 1.1 percent, and that’s helped pull down the six-month rate for the overall food index to its current level of just 2.1 percent. That rate had been as high as 5.6 percent just six months earlier.
We tend to think that movements in the prices of less-processed food items contain a high percentage of noise. To get a sense of the underlying trend in food price inflation, we thus like to look at our price index for more-processed food items. Here, while we continue to see a gradual abatement of “foodflation,” the deceleration has been less dramatic. Our more-processed index posted a 3.4 percent annualized increase in February, roughly in line with the 3.5 percent annualized rate it’s averaged over the last six months.
Like the overall index, the six-month rate for more-processed items stood at about 5.6 percent six months ago.
Dissecting the Core—Round Up the Usual Suspects!
As a rule, prices for core services tend to be less volatile than prices for core goods. There are, however, some services that also display high price volatility, and February’s data feature large contributions from almost all of these exceptional items. In particular, February saw large increases in the price indexes for air travel (17 percent annualized) and lodging at hotels and motels (30 percent). The two categories together contributed about 0.3 annualized percentage points to February’s core rate.
Even more striking—though no more surprising—were movements in indexes for two components of financial services. The index for financial service charges, fees and commissions increased at a nearly 25 percent annualized rate and contributed roughly half a percentage point to the February core rate. The price index for the services of “other depository institutions and regulated investment companies” posted a roughly 30 percent annualized rate of increase and contributed about 0.4 annualized percentage points to February’s core rate.
Intuitively, the outsized impacts couldn’t have been solely at the positive end of the spectrum, else February’s trimmed mean rate—which excludes both positive and negative extremes—would not have come so close to February’s core rate. And sure enough, there were also a number of big-impact price declines in February, led by items we’ve come to expect to see in one of the tails of the distribution of price changes. In particular, two components of the volatile apparel category—women’s and girls’ clothing, and men’s and boys’ clothing—experienced sharp declines in February (annualized 9 percent and 18 percent, respectively). The price index for jewelry, another volatile component of core goods, also fell at an 18 percent annualized rate. Those three components combined to subtract about 0.6 annualized percentage points off February’s core rate.
Finally, the price index for the awkwardly-named “final consumption expenditures of nonprofit institutions serving households” declined about 6.3 percent, annualized, and subtracted about a quarter of an annualized percentage point from February’s core rate.
On the whole, prices for core goods fell at a 1 percent annualized rate in February, while prices for core services rose at a 2.5 percent annualized rate. Over the last six months, core goods prices are down at a roughly 0.2 percent annualized rate—a sharp contrast from six months earlier when they were rising at a 2.3 percent annualized rate. Core services inflation, as usual, has been steadier—our price index for core services is up an annualized 2.2 percent over the past six months, virtually identical to its six-month rate from six months earlier.
Growth in Housing Costs Slowing Over the Past Few Months
Two components that lend stability to the core services index are rent and owners’ equivalent rent (OER). In February they took steps in opposite directions, with OER growth slowing to an annualized 1.2 percent from 2.6 percent in January, and rent growth increasing to 2.7 percent from 1.8 percent.
The pick-up in rent growth reverses, to a small extent, a general pattern of downward drift since around September of last year. Nevertheless, the six-month growth rate for rent ticked down to 2.8 percent from 3.1 percent in January. For the six months ending in December of last year, rent growth averaged an annualized 3.3 percent, its postrecession peak.
The six-month rate for OER shows a similar, albeit less pronounced, pattern, with an apparent peak of 2.4 percent in December, declining to 2.1 percent in February.
Based on just a couple months’ worth of data, it’s difficult to distinguish a turn in trend from a pause or a plateau, and these patterns in housing pricings may soon reverse themselves. If not—that is, if we continue to see deceleration—there will be strong tendency toward deceleration in core services inflation, given housing’s large expenditure weight.
Little Movement in the Number of Falling-Price Components
Finally, February saw little change in the fraction of PCE components declining in price. Of the 178 components we look at in constructing the trimmed mean, 35 percent declined in price in February, compared with 34 percent in January, and up from the series’ most recent low of 32 percent last November.
When components are weighted by their shares of consumer expenditure, there was a slight decline in the fraction of falling-price items, from 30 percent of the PCE basket to 26 percent. If you consult the chart on our trimmed mean PCE web page, you’ll see the flip side of this movement—a slight increase in the fraction of items rising in price. More dramatic, though, is the shift within the distribution of price increase, in particular the growth in the fraction of components experiencing small increases, at the expense of the other categories. This shift probably owes mainly to the movement of OER from the 2–3 percent category into the 0–2 percent category.
March 30, 2012