Behind the Numbers: PCE Inflation Update, April 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 Dallas Fed’s trimmed mean PCE inflation rate for April was an annualized 1.5 percent, down from 2 percent in March and below the rates we’ve seen since late last year. From last October through March, annualized monthly trimmed mean rates have ranged from 1.7 percent to 2.2 percent, averaging 1.9 percent over that period.
The 12-month trimmed mean rate—which had spent five straight months locked in at 1.9 percent—inched down to 1.8 percent in April. The six-month trimmed mean rate also shed a tenth of percentage point, coming in at 1.8 percent in April.
The trimmed mean indicates that the underlying trend in PCE inflation is certainly not accelerating. Whether the trend is actually slowing is a harder call to make, based on just a few observations and differences of just a tenth of a percentage point. Whether steady or slowing, the trend rate remains just under 2 percent. Our best forecast of the rate that the headline, or all-items, PCE index will average over the next 12 months is 1.8 percent, the latest 12-month trimmed mean rate.
For the month of April, though, the headline inflation rate was essentially zero, coming in at an annualized 0.2 percent. As expected, a large decline in the seasonally adjusted price of gasoline—27 percent at an annualized rate—pulled the April headline rate down. An index excluding just gasoline would have posted a 1.3 percent annualized increase in April.
Given the continued decline in gasoline’s price, we should see an even more dramatic impact when PCE data for May are released on June 29.
The six-month headline rate held steady at 1.9 percent, while the 12-month headline rate fell to 1.8 percent from 2.1 percent in March. The 12-month rate has shed more than a full percentage point since last September. At that time, a string of hefty gasoline price increases had pushed the 12-month rate up to 2.9 percent.
May’s Headline Inflation Rate Will Almost Certainly Be Negative
As we noted above, a PCE index excluding gasoline would’ve posted a 1.3 percent annualized inflation rate in April, rather than the 0.2 percent we actually saw. In that sense, the decline in the price of gasoline shaved about 1.1 annualized percentage points off April’s headline rate.
Based on price movements recorded over the past four weeks, though, gasoline’s impact in April will look modest compared with its impact on the headline rate in May.
The PCE price index for gasoline and other motor fuel fell 2.6 percent in April (not annualized). That number is seasonally adjusted and reflects an unadjusted gain (1.8 percent) that was smaller than the expected seasonal increase for April (4.4 percent). In May we’ve seen outright, unadjusted price declines, in a month when we would normally expect further healthy increases.
Based on four weeks’ worth of retail price data collected by the Department of Energy, the price of gasoline in May looks to have fallen roughly 4.7 percent from its average in April. The typical seasonal price change in May is about a 3.4 percent increase. Thus, the seasonally adjusted price of gasoline likely fell 8.1 percent, which is about three times the size of the decline in April. We’d thus expect a contribution from gasoline in May PCE that’s about three times the size of its April contribution—a subtraction of roughly 3 annualized percentage points from the headline rate, compared with April’s 1.1 percentage points.
Barring some surprising developments—everything else in the PCE basket averaging a greater than 3 percent rise—May’s headline rate should come in at a negative value.
Food Is Now a Drag on the Headline Index
This development actually occurred in last month’s release, but escaped our notice: The six-month rate of increase in the PCE price index for food is now below the six-month rate of increase in the headline PCE price index. In other words, at least on a six-month basis, food prices are helping hold down the headline rate, rather than boosting it.
In March, the six-month rate for all food items was an annualized 1.3 percent, compared with a six-month headline rate of 1.9 percent. In April, the six-month rate for food fell further, to an annualized 1.1 percent, its lowest reading since November 2010. Food’s six-month inflation rate peaked at 6.7 percent last June.
Developments in April were even more positive than one would gather from just looking at all food prices together. Prices for more-processed food items—which give a better indication of the trend in food price inflation—posted a negligible 0.2 percent annualized rate of increase in April. This comes on the heels of a very modest 1 percent rate in March. The six-month rate of increase in prices of more-processed items fell to an annualized 1.9 percent in April from 2.7 percent in March, itself a substantial decline from 3.5 percent in February.
Over the past 12 months, food prices are still up at a rate exceeding the corresponding 12-month headline PCE rate—2.8 percent for food versus 1.8 percent for the headline index—but this largely reflects the behavior of food prices prior to last September.
Core Goods Prices Little Changed in April; Core Services Prices Post Trend-Like Gains
Prices for core goods were close to unchanged in April, after posting an outsized increase in March. Our index of core goods prices fell at a 0.2 percent annualized rate in April, in spite of steep increases in women’s and girls’ clothing prices (up about 13 percent annualized) and the price index for “sporting equipment, supplies, guns and ammunition” (up at a roughly 25 percent annualized rate). Those two components combined to add about 0.3 annualized percentage points to April’s headline inflation rate.
Offsetting those increases were large price declines for jewelry (–35 percent) and “games, toys and hobbies” (–16 percent). Those two components together shaved about 0.3 annualized percentage points off April’s headline inflation rate. The price index for televisions also experienced a somewhat larger than normal decline (–36 percent).
Our price index for core services posted a 2.3 percent annualized rate of increase in April, compared with a 2 percent increase the month before and not far off either the index’s 6-month or 12-month rates of increase (2.5 percent and 2.2 percent, respectively).
Among core services, a second consecutive large decline in the volatile price index for “financial service charges, fees and commissions” (–2.9 percent annualized) made the most significant negative contribution to April’s headline rate, though only about –0.1 annualized percentage points.
The big-impact service items at the positive end of the spectrum were there more on account of their heft as shares of consumer spending than for the size of their price increases. The prices indexes for dining out (up an annualized 3.5 percent) and nonprofit hospital services (up 2.8 percent) combined to contribute about 0.3 annualized percentage points to the headline PCE rate.
Of course, rent and owners’ equivalent rent (OER), owing to their large expenditure weights, often rank among the biggest-impact items in the PCE basket. In April, both components posted rates in line with their recent trends. Rent increased at a 2.6 percent annualized rate, between its average rates over the past six and 12 months (2.4 percent and 2.7 percent). After experiencing monthly gains in the range of 3 to 5 percent in the second half of last year, monthly rent growth has bounced around in the range of 2 to 3 percent.
The rate of increase in OER in April exactly matched its six- and 12-month rates, all 2.1 percent. Some minor ups and downs aside, growth in OER has been basically at a plateau just above 2 percent since the middle of last year.
Share of Falling-Price Items Ticks Up Slightly; Fewer Items Experience Rapid Price Growth
Of the 178 components in our PCE basket, the fraction registering price declines ticked up in April, to just over 35 percent from 33 percent in March. Since recording back-to-back months over 40 percent, last October and November, the falling-price share has been fairly steady in a range of 32 to 35 percent.
When components are weighted by their shares of expenditure, about 26 percent of the PCE basket declined in price, up from a low 19 percent in March. Within the 74 percent of the basket that increased in price in April, the fraction experiencing more rapid price increases—faster than 3 percent, annualized—fell from 34 percent to 26 percent, the lowest that fraction has been over the past 12 months.
June 1, 2012