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Behind the Numbers: PCE Inflation Update, September 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 September was an annualized 1.9 percent, up from a revised 1.7 percent in August. With the revision to August (originally reported as an annualized 2.0 percent rate), and the latest reading, the trimmed mean has now recorded six straight months of rates below annualized 2.0 percent, though just barely in September.

The six-month trimmed mean rate ticked down to an annualized 1.6 percent from 1.7 percent in August. The 12-month trimmed mean rate held steady at 1.8 percent for a third month in a row. As we’ve noted before, the current 12-month trimmed mean rate is a good forecast of average headline PCE inflation over the next 12 months—so we expect the headline rate to average 1.8 percent between now and September 2013.

For now, though, the headline PCE inflation rate continues to be buffeted by movements in energy prices, especially the price of gasoline. For a second month in a row, the headline price index increased at a roughly 5 percent annualized rate (5.0 percent in August and 4.7 percent in September), with increases in the price of gasoline being the main contributor.

Of course, these gasoline-fueled gains in the headline index follow several months of the opposite pattern—low headline rates, pulled down by declines in the price of gasoline. Consequently, average headline rates over several months remain moderate—the six-month headline rate was an annualized 1.5 percent in September while the 12-month headline rate came in at 1.7 percent. Both of these rates are up a bit from their August levels (annualized 1.2 percent for the six-month rate and 1.5 percent for the 12-month rate).

Note that at 1.7 percent, the current 12-month headline rate is not far from the 1.8 percent rate we would forecast (based on the trimmed mean) for the coming 12 months, so—in effect—we’re expecting very little change in headline PCE inflation.

September Another Big-Impact Month for Gasoline Prices; Negligible Impact Expected in Next Month’s Data

The PCE price index for gasoline and other motor fuel increased 7.1 percent in September (corresponding to an annualized rate of over 125 percent). This follows an 8.9 percent increase in August. With gasoline representing about 4 percent of consumption expenditures, price movements of that magnitude have large effects on the headline inflation rate. In September, for example, gasoline alone contributed 3.2 annualized percentage points to the 4.7 percent headline rate. In that calculation, we’re measuring gasoline’s contribution by comparing the actual headline rate to an inflation rate we constructed excluding gasoline (and only gasoline). Adding together all the components but gasoline would’ve produced an inflation rate of annualized 1.5 percent, hence the 3.2 percentage points we attribute to gasoline.

Based on more recent data, we probably won’t see a third straight month of high headline rates when PCE data for October are released. Weekly retail price data collected by the Department of Energy (DOE) point to a roughly zero percent increase in the PCE price index for gasoline in October—the DOE data have gasoline tracking at a 1.4 percent decline from September to October, which is about equal to the normal seasonal decline we’d expect from September to October. What enters into PCE is the seasonally adjusted change in price, and that change looks right now to be essentially nil.

Looking further ahead—through the lens of futures market prices—we should see gasoline acting as a slight drag on the headline rate over the next 12 months. The 12-month futures price for Brent crude oil—the main determinant of gasoline prices—is about $6 per barrel below the current price for Brent. Using the rule of thumb that a $10-per-barrel movement in the oil price corresponds to a 25 cent movement in the price of gasoline, the oil futures data point to a decline in the price of gasoline of about 15 cents per gallon over the coming year.

Food Prices Down in September

The PCE price index for food—more formally, “food and beverages purchased for off-premises consumption”—declined at a 0.7 percent annualized rate in September. The index is up just an annualized 0.6 percent over the past six months and 0.9 percent over the past 12 months.

September’s decline in the overall index was driven by a sharp decline (4.8 percent at an annualized rate) in our price index for less-processed food items. Our index of more-processed food items increased in September at an annualized rate of 1.0 percent. Over the past 12 months, the less-processed index is up just 0.3 percent, while the more-processed index is up 1.2 percent.

Core Goods Prices Down Again in September; a Mixed Bag of Big-Impact Items

Prices for core goods decreased at a 1.1 percent annualized rate in September. This follows a comparably large decline in August, roughly 2 percent at an annualized rate. Among core goods, prescription drugs, men’s and boys’ clothing, used light trucks, and the price indexes for “games, toys and hobbies” and “clocks, lamps, lighting fixtures and other household decorative items” made significant negative contributions to September’s headline inflation rate. Those components combined to shave about 0.6 annualized percentage points off September’s headline rate. Most experienced hefty price declines; prescription drugs, the exception, fell only about a quarter of a percent at an annualized rate, but had a large impact owing to its large weight in expenditure (about 2.8 percent).

Those big-impact declines more than offset price increases for jewelry (up an annualized 26 percent) and women’s and girls’ clothing (up an annualized 9.6 percent).

Over the past six months, our index of core goods prices is down by an annualized 0.3 percent. For the past 12 months, the index is up 0.2 percent. Those rates are not too far from the very long-run average behavior of core goods prices (since the mid-1990s, core goods prices have on average declined at about a 0.4 percent annualized rate).

Core services prices increased at a 2.3 percent annualized rate in September. As has often been the case, a couple components from the volatile financial services category had outsized impacts. Both were in that set of financial services where prices are imputed for services where consumers pay no explicit fees. A “free” checking account, for example, isn’t really free—the depositor is paying for the service by accepting a lower yield on the account. In September, the price indexes for those sorts of services at commercial banks and at “other depository institutions and regulated investment companies” increased sharply and combined to contribute just over 0.3 annualized percentage points to the headline PCE inflation rate.

At the other end of the spectrum—that is, the core services with large negative impacts on the headline inflation rate—there were really no outsized declines in price. The items with big negative impacts produced those impacts mainly by virtue of their weight in expenditure, in combination with modest movements in price. The price index for paramedical services, for example, fell at just a 0.6 percent annualized rate and subtracted a little over 0.1 annualized percentage points from September’s headline inflation rate. Paramedical services have a weight in expenditure of about 2.6 percent.

Over the past six months, our price index for core services is up 2.0 percent at an annualized rate. The index’s 12-month inflation rate is slightly higher, at 2.2 percent.

Rents Continue Robust Growth

Rent and owner’s equivalent rent (OER), two of the largest items in the basket, both experienced relatively robust growth in September. Rent increased at a 3.4 percent annualized rate in September and has averaged a 3.2 percent rate over the past three months (up from an average 2.2 percent rate over the prior six months).

OER increased at a 2.7 percent annualized rate, following a 3.1 percent reading in August. Over the past three months, OER has increased at an annualized rate of 2.7 percent, compared with an annualized rate of 1.8 percent over the prior six months.

While the recent numbers for these shelter components may seem high, they are not that far off historical averages. Over the low-inflation period that began around the mid-1990s, rent has averaged a 3 percent annualized rate of increase, while OER has averaged a 2.6 percent rate. Core services as a whole have averaged a 2.7 percent annualized rate over that span of time.

Fraction of Falling-Price Components Dips

Last, the fraction of items in our basket of 178 components that experienced price declines fell slightly, to 41 percent in September from 45 percent in August. Historically, falling-price shares in the 40s are unusually high, so September’s number represents a step in the direction of normalcy.

Looking at the distribution of component price changes when components are weighted by their shares of expenditure, we see little change from August to September. Both months had about a 75 percent/25 percent split between components rising in price and components falling in price. And, in both months, among components rising in price, about half (by expenditure weight) rose at a better than 2 percent annualized rate, and half rose at a rate of 2 percent or less.

—Jim Dolmas
October 29, 2012


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