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Behind the Numbers: PCE Inflation Update, May 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 May was an annualized 1.4 percent, which is at the lower end of the trimmed mean’s recent range—the monthly trimmed mean rate last dipped to 1.4 percent back in September 2011, and has averaged 1.9 percent in the interim.

This month’s release incorporates the BEA’s revision of the underlying data since January of this year. Trimmed mean rates for January, March and April increased as a result. The revised data point to a slightly higher rate of trend PCE inflation. The 12-month trimmed mean rate through April had been 1.8 percent; post revision, it is now 1.9 percent, a level at which it held steady in May. The six-month trimmed mean rate for April was revised up to 2.0 percent from 1.8 percent. From the revised 2.0 percent for April, the six-month rate fell to 1.8 percent in May.

In the revised data, there continues to be no indication that the underlying trend is accelerating, though perhaps also less indication that it could be decelerating. As before, the trend rate remains just under 2 percent. Based on the revised data, our best forecast of the rate that the headline, or all-items, PCE index will average over the next 12 months is now 1.9 percent, the latest 12-month trimmed mean rate.

In last month’s Inflation Update, we confidently predicted a negative headline rate for May. We weren’t really going out on a limb with that prediction, given that we had, at that point, nearly complete data on the price of gasoline for May. The price of gasoline ended up falling a bit less than we had expected—just 6.9 percent (seasonally adjusted) versus our prediction of an 8.1 percent decline—but the decline was still more than enough to pull the headline rate into negative territory. The headline index fell at an annualized 2.2 percent rate in May, after posting a negligible increase in April.

The revision increased the six- and 12-month headline rates through April—where previously we thought those rates were 1.9 and 1.8 percent, respectively, they are now estimated at 2.0 and 1.9 percent. Both dropped off noticeably in May, with the six- and 12-month headline rates each coming in at 1.5 percent.

Note that the release of PCE data for June will incorporate a more comprehensive revision by BEA, affecting data going back to 2009.

Gasoline Prices Continue to Fall

As noted above, the seasonally adjusted price of gasoline (and other motor fuel) fell 6.9 percent in May. That follows a 2.6 percent decline in April. On a 12-month basis, the price index for gasoline and other motor fuel is down roughly 4.5 percent—its first 12-month decline since October of 2009.

Based on the data we have so far for June—collected weekly at the retail level by the Department of Energy—the price of gasoline is on pace for a 2.2 percent decline in July, after taking account of normal seasonal patterns. That’s probably not enough to produce another negative headline PCE inflation rate but is likely sufficient to push June’s headline rate to near zero, assuming the components apart from gasoline repeat their performance from May.

Looking further ahead, the decline in gasoline prices is apt to continue. Professor James Hamilton of the University of California, San Diego, had a very informative blog post this past week, examining the relationship between the price of crude oil and the price of gasoline. According to Hamilton, who is a noted expert in the economics of energy markets, based on recent movements in the price of crude oil, we can expect gasoline prices to come down by another 35 cents over the coming weeks. That would be a decline of roughly 10 percent. (Read Hamilton’s postoff-site.)

Food Prices Down in May; Trend Continues to Moderate

The PCE price index for food fell at a 1.3 percent annualized rate in May, following several months of either very modest increases or negligible declines. Overall food prices are up just 1 percent, annualized, over the past six months, and 2.3 percent over the past 12 months.

May’s decline was broadly based, with our indexes of less-processed and more-processed food items both showing declines (annualized 2 percent for the less-processed index and annualized 1 percent for the more-processed index).

The price index for more-processed food items has decelerated sharply over the past few months, following up a 3.4 percent annualized rate in February with monthly readings of 1.0 percent, 0.2 percent, and now –1.0 percent. The index’s six-month rate—probably a good indication of the trend in overall food price inflation—now stands at 1.6 percent.

Core Goods and Services Inflation Not Far from Long-Term Trends

Outside of food and energy, April saw a small increase in the prices of core goods (up roughly 0.6 percent annualized) and a modest increase in the prices of core services (up an annualized 1.7 percent). Over the past six months, our price indexes for core goods and services are up at annualized rates of 0.5 percent and 2.6 percent, respectively.

This pattern is not that far from what’s typical in a longer-run sense: On average, for the period of relatively low inflation that began around 1994, core goods inflation has average about –0.3 percent and core services inflation has averaged about 2.7 percent.

Among core goods, the big-impact items in May were women’s and girls’ clothing, jewelry, household linens and a couple portmanteau categories that consist mainly of personal care products (one focused on hair care and dental care products, the other on cosmetics and perfumes). The price index for women’s and girls’ clothing posted yet another large increase—annualized 6.3 percent—and added about 0.1 annualized percentage points to May’s headline inflation rate. The other components registered outsized declines in May. Among these, jewelry had the largest impact, subtracting about 0.1 annualized percentage points from the headline rate.

Within core services, the price index for hotels and motels (up 24 percent at an annualized rate) had a significant positive impact, contributing nearly 0.2 annualized percentage points to May’s headline inflation rate. At the other end of the spectrum, the index for the final consumption expenditures of nonprofit institutions serving households (down 11 percent at an annualized rate) shaved about a quarter of an annualized percentage point off May’s headline inflation rate.

A few other components of services had large impacts, though owing more to their heft in consumer expenditure than to any outsized movements in their prices—the price indexes for dining out (“other purchased meals”), nonprofit hospital services and owners’ equivalent rent.

Owners’ equivalent rent posted a 1.1 percent annualized increase in May—its lowest one-month reading since early 2011—and shows some slight downward drift over the past several months. Its six-month rate of increase has fallen off from an annualized 2.4 percent at the end of 2011 to 1.9 percent in May. Rent—the usual rent paid by renters—recorded a 2.4 percent annualized increase in May, in line with its current six-month rate (also 2.4 percent). Rent growth has experienced a more noticeable deceleration since the end of 2011—its six-month rate stood at 3.3 percent in December.

More Components Decline in Price; Fewer Big Price Increases

Finally, May saw an increase in the fraction of our 178 PCE components registering price declines, to 39 percent from 35 percent in April.

When components are weighted by their shares in expenditure, roughly 73 percent of the basket rose in price and 27 percent fell in price, about the same as in April. Among components rising in price, we saw a noticeable drop-off in the share experiencing more rapid price increases—the share of all 178 components increasing at a better-than-2-percent pace fell from about 55 percent in April to about 43 percent in May.

—Jim Dolmas
June 29, 2012


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