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Behind the Numbers: PCE Inflation Update, December 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.

Underlying consumer price inflation, as measured by the Dallas Fed’s trimmed mean PCE inflation rate, continued to slow in December. The trimmed mean inflation rate for December was an annualized 0.9 percent, following an annualized 1.4 percent rate in November.

The six-month trimmed mean inflation rate ticked down to an annualized 1.3 percent in December, from an annualized 1.4 percent a month earlier. Over the last three months of 2012, the trimmed mean averaged just a 1.1 percent annualized rate.

The 12-month trimmed mean rate also inched down, to 1.5 percent in December from 1.6 percent in November. Since the end of 2011, the 12-month trimmed mean rate has lost 0.6 percentage points.

The headline PCE price index was close to unchanged in December, declining at a scant 0.5 percent annualized rate. Falling gasoline prices were the main culprit behind the slight decline, but more generally December was characterized by weak price pressures. The fraction of components in the PCE basket registering price increases fell slightly, and among the components whose prices did go up, we saw a substantial increase in the fraction rising at rates less than an annualized 2 percent (and a corresponding decrease in the fraction rising at faster rates).

The six-month headline PCE inflation rate fell to an annualized 1.2 percent in December from an annualized 1.5 percent in November. The index’s 12-month rate inched down to 1.3 percent from 1.4 percent a month earlier.

At 1.3 percent, the 12-month headline inflation rate is slightly below the 12-month trimmed mean rate of 1.5 percent. As regular readers of the Inflation Update know, our rule-of-thumb forecast for headline inflation over the coming 12 months is always trimmed inflation over the previous 12 months. We thus expect headline PCE inflation to firm slightly, toward an average rate of 1.5 percent, over the coming year.

Gasoline a Drag in December, On Track for an Identical Performance in January

The PCE price index for gasoline and other motor fuel fell 2.3 percent in December, following a 7.3 percent decline in November. The index finishes 2012 up 1.7 percent from the end of 2011. That figure is looking at the December-to-December change; if we compare the average level of gasoline prices in 2012 to the average level in 2011, the increase is a heftier 3.5 percent.

December’s 2.3 percent decline in the gasoline and motor fuel index contributed about -1.0 annualized percentage points to December’s headline inflation rate. Based on movements in the price of gasoline in recent weeks, we’re apt to see a comparably-sized negative contribution when PCE data for January are released. Weekly retail price data from the Department of Energy show the price of gasoline on pace to increase about a quarter of a percent from December. That’s significantly less than the usual seasonal increase in January, which has been about 2.7 percent of late. A quarter percent increase when the usual seasonal increase is 2.7 percent implies a seasonally adjusted decline of 2.4–2.5 percent.

Thus, assuming all items other than gasoline repeat their December performances in January (on average), we should see a repeat of December’s effectively zero headline inflation rate.

Among other energy-related goods and services, only natural gas posted a robust gain in December, up 1.3 percent (not annualized) from November. The PCE price index for fuel oil was essentially unchanged in December, and the index for electricity services increased a tame 0.2 percent.

More-Processed Food Items Post Second Consecutive Robust Gain

The pickup in food price inflation that began in October continued in December, with prices for food as a whole rising at a 3.2 percent annualized rate. This comes on the heels of rates of annualized 2.7 percent and 3.6 percent the previous two months.

Prices for less-processed food items increased at a 4.8 percent annualized rate and are up an annualized 3.4 percent over the past six months. Prices for more-processed food items posted a second consecutive robust gain, rising at an annualized rate of 2.6 percent in December, after rising at a 3.2 percent rate in November. Over the prior 12 months—that is, through October—our more-processed index rose just 0.8 percent, so November and December represent a rather significant break from the index’s past behavior.

The prices of more-processed items tend to be less volatile than those of less-processed items, and they also constitute the majority of food as a whole—about 70 percent, as a share of food expenditure. Thus, while two months do not quite make a trend, the very recent behavior of more-processed food prices suggests that a faster pace of food price inflation is likely to persist for at least the next few months.

Core Goods Prices Continue to Tumble, Have Large Impact on Slowing Headline Inflation

Apart from food and energy, core services price gains remained moderate in December, while core goods prices continued to slide.

Prices for core services increased at a 1.6 percent annualized rate in December, similar to November’s rate. Price indexes for various financial services continued to be among the biggest-impact components within the core services category. Large declines in the price indexes for the services of commercial banks, other nondepository financial institutions and “financial service charges, fees and commissions” combined to shave about 0.6 annualized percentage points off December’s headline inflation rate. The price index for hotels and motels—always among the most volatile within the services category—also experienced an outsized decline (13 percent at an annual rate) and subtracted about 0.1 annualized percentage points from the headline inflation rate. The index for airline services (up 26 percent at an annual rate) added about 0.1 annualized percentage points.

On a six-month basis, core services prices were up an annualized 1.5 percent in December, a slight tick down from the 1.6 percent rate recorded in November. The 12-month core services inched down to 1.9 percent from 2.1 percent a month earlier.

Core goods prices, meanwhile, posted a large 3.7 percent annualized decline in December, their fourth decline in the past five months. The price indexes for prescription drugs, “toys, games, and hobbies,” and women’s and girls’ clothing were among the biggest-impact decliners. Each subtracted a bit more than 0.1 annualized percentage points off December’s headline inflation rate. There were no core goods among the biggest-impact items at the positive end of the spectrum.

For the six months ending in December, core goods prices declined by an annualized 1.4 percent. That’s the biggest drop we’ve seen since a 1.5 percent annualized decline for the six months ending in September 2007. The 12-month inflation rate for core goods was –0.3 percent in December, compared with –0.1 percent in November. The 12-month rate for December 2011 was 2.1 percent, so we’ve seen a swing of nearly 2.5 percentage points over the past year.

Core goods—in expenditure terms—amount to about 23 percent of PCE. Thus, if we compare headline PCE inflation for the 12 months ending in December 2011 (2.4 percent) with headline inflation for the 12 months ending in December 2012 (1.3 percent), roughly 0.6 percentage points of the decline—about half of the 1.1 percentage point difference—owes to the swing in core goods inflation.

Price Increases Both Fewer and Smaller

As we noted in the introductory section, December saw a smaller fraction of components in the PCE basket rising in price, compared with November. Unweighted by expenditure—that is, simply counting the number of price increases and dividing by the total number of components in our basket—63 percent of the basket rose in price in December, down from 66 percent in November. Weighting components by their shares of expenditures, about 69 percent of the basket rose in price in December, compared with about 73 percent in November.

That change is smaller compared with the shift within the set of components increasing in price, where December saw a much bigger fraction registering small increases—between zero and an annualized 2 percent—than did November. With components weighted by their expenditure shares, in December we had 42 percent of the PCE basket posting price increases of less than 2 percent and 27 percent posting larger increases. In November, the comparable figures were 25 percent in the 0–2 percent range and 48 percent in the better-than-2-percent range.

Our trimmed mean PCE webpage has a nice chart illustrating this shift.

—Jim Dolmas
January 31, 2013

 

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