Behind the Numbers: PCE Inflation Update, August 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 August was an annualized 2.0 percent, up from July’s annualized 1.3 percent. August’s number breaks a string of consecutive sub-2-percent readings that had reached four months. Over that period, the trimmed mean had averaged a 1.4 percent annualized rate.
The six-month trimmed mean rate inched up to an annualized 1.7 percent from 1.6 percent in July. The six-month rate is still off its recent high of 2.2 percent last August. The 12-month trimmed mean rate held steady at 1.8 percent for a second consecutive month.
In contrast, headline PCE inflation for August was a hefty 5.3 percent at an annualized rate, owing mainly to a steep increase in the price of gasoline. This follows an essentially zero reading in July and breaks a string of four months of very tame headline inflation rates. Over that span—April to July—the average headline inflation rate was an annualized -0.2 percent.
The six-month headline rate rose to an annualized 1.2 percent in August from 1.0 percent in July, while the 12-month headline rate increased to 1.5 percent from 1.3 percent. Both rates are still well below their recent highs. The six-month rate had reached an annualized 3.6 percent in May 2011, declined to 1.6 percent by the end of 2011 and climbed back to 2 percent in April of this year. The 12-month rate had reached 2.9 percent in September 2011 and had drifted consistently downward until this latest reading.
On the whole, in spite of August’s high headline rate, the behavior of the trimmed mean indicates that underlying PCE inflation remains moderate. If we take the 12-month trimmed mean rate as an indicator of the trend in headline PCE inflation, that trend is for now holding steady at just below 2 percent.
Gasoline Prices Boost Headline Inflation, May Be Poised to Decline
The jump in the headline PCE index comes as no surprise, given what we already knew about the behavior of gasoline prices in August. Gasoline prices surged 9 percent in August, after increasing about a quarter of a percent in July. Those figures are seasonally adjusted, though not annualized; August’s 9 percent increase translates to a roughly 180 percent annualized percent rate. Gasoline alone contributed about 3.8 annualized percentage points to August’s 5.3 percent headline rate.
Even with August’s increase, the PCE price index for gasoline and other motor fuel is up just 1.9 percent over the past 12 months. The price index for all energy goods and services is close to unchanged over the same period, as declines in price for both electricity services (–1.2 percent over the past 12 months) and natural gas (–11 percent) offset the modest gain is gasoline prices.
Looking ahead, weekly retail price data from the Department of Energy show gasoline prices on pace for a 3.4 percent increase in September. That number might change (we are still a week shy of having a full month’s data), but if it holds up, it would imply a roughly 6 percent increase in the seasonally adjusted price of gasoline. The usual seasonal effect for September is a 2.7 percent decline.
Looking ahead even further, the price of Brent crude oil—the key determinant of the price of gasoline—has fallen in recent weeks, to around $111 per barrel from a high around $117 per barrel in mid-September. Futures prices point to a further decline of about $5 per barrel over the next 12 months. A rough rule of thumb relating crude oil prices to gasoline prices is that a $10 per barrel change in the oil price eventually leads to a 25 cent per gallon change in the price of gasoline, so the futures prices are pointing to about a 12.5 cent decline in the price of gasoline over the coming 12 months.
No Sharp Increase in Overall Food Prices—Yet
The PCE price index for food was up an annualized 0.9 percent in August, in line with the index’s rate of increase over the past six months but below its current 12-month rate of 1.5 percent.
Food prices in August displayed yet another contrast between movements in price for less-processed items and more-processed items. In June and July, we actually saw large increases in price at the less-processed end of the spectrum—annualized 10.9 and 5.7 percent, respectively—while prices at the more-processed end fell—by annualized 0.1 and 2.3 percent. The difference in August was not quite as stark, though nevertheless significant: our price index for less-processed food items increased at a 2.3 percent annualized rate, while our index for more-processed items advanced at a scant 0.4 percent rate.
Fresh fruit—which increased in price at a 25 percent annualized rate—had the biggest impact among less-processed items. Prices for eggs and pork also registered sharp increases. The price indexes for wine (–15 percent annualized rate) and sugar and sweets (–25 percent) were the most significant drags on our more-processed index.
To the extent consumers are feeling the effects of the recent drought—which we discussed in May’s Inflation Update—those effects appear to be limited so far to the prices of less-processed items, with little noticeable impact on food prices taken as a whole.
Hefty price increases may still be around the corner: Economists at the U.S. Department of Agriculture continue to forecast food price inflation of 2.5 to 3.5 percent for 2012 (www.ers.usda.gov/data-products/food-price-outlook.aspx). Given that over the first eight months of the year, the PCE price index for food is up just 0.8 percent at an annualized rate, that forecast—in order to come true—would require very large increases over the final four months of the year.
Core Goods Prices Record Large Decline in August
Apart from energy and food, August saw a steep decline in the prices of core goods and trend-like gains in the prices of core services.
Our index of core goods prices fell at a 2 percent annualized rate in August, its biggest monthly decline since September 2011. Sharp declines in prices of apparel and the PCE price indexes for “computer software and accessories” and “games, toys, and hobbies” all had large negative impacts. The cumulative effect of those price declines more than offset a sharp increase in the price of jewelry, the biggest-impact item among core goods price increases. Women’s and girls’ clothing, which fell at a roughly 15 percent annualized rate in August, alone shaved about 0.4 annualized percentage points off August’s headline PCE inflation rate.
Over either the past six or 12 months, core goods prices are up just 0.1 percent at an annual rate.
Our index of core services prices rose at an annualized 2.5 percent rate in August. That’s virtually identical to the index’s average rate of increase over the past 10 years. The price index for the services of nonprofit hospitals had the biggest positive impact among core services, increasing at an annualized rate of about 15 percent and contributing about 0.5 annualized percentage points to the August headline rate. At the opposite end of the spectrum, the price index for the final consumption expenditures of nonprofit institutions serving households fell at a roughly 24 percent annualized rate and shaved about a full annualized percentage point off the August headline inflation rate.
The six- and 12-month rates of increase in core services prices held steady at annualized 2.0 and 2.1 percent, respectively.
Perhaps the most noticeable price movement within core services—albeit not the most impactful—was a pickup in the rate of growth of owners’ equivalent rent (OER). In August, OER increased at a 3.1 percent annualized rate, up from a 2.1 percent rate in July. August’s increase is the biggest one-month gain in OER since November 2008. Nevertheless, OER’s 12-month rate of increase remained at 2 percent, where it had been in each of the prior two months.
Rent—the actual rent paid by renters, as opposed to the rent imputed to homeowners—increased at a 2.3 percent annualized rate in August, down from a 3.8 percent rate in July. The 12-month rate of increase in rent ticked down to 2.6 percent from 2.8 percent a month earlier.
Mixed Signals from the Distribution of Component Prices
Finally, of the 178 components that potentially go into the trimmed mean each month, 81—about 45 percent—registered price declines in August, similar to the fraction recorded as falling in July. That number is higher than normal. (For the period since the mid-1990s, a normal falling-price share is around 30 percent.)
The signals coming from the underlying distribution of component prices are somewhat mixed, though. If we weight components by their shares of consumer expenditure, the weighted fraction of falling-price components declined in August to 26 percent from 33 percent in July. That 26 percent for August is fairly normal—the average weighted falling-price share since the mid-1990s is about 25 percent.
September 28, 2012