Behind the Numbers: PCE Inflation Update, February 2013
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 headline, or all-items, PCE inflation rate for February was a robust 4.8 percent at an annualized rate, pushed up by a sharp increase in the price of gasoline. As we predicted in last month’s Inflation Update, gasoline alone contributed about 4 annualized percentage points to February’s headline inflation rate. Truth be told, though, February’s headline number was a bit less than we were expecting, as prices for items apart from energy, on average, increased at just a 0.8 percent annualized rate (compared with a 1.3 percent rate for those items over the past 12 months).
The small increase in prices, on average, outside of energy might suggest weak underlying inflation in February, but the Dallas Fed’s trimmed mean PCE inflation rate tells a somewhat different story. The trimmed mean inflation rate for February was an annualized 2.0 percent, up from a revised 1.7 percent rate in January. February’s reading is thus a bit higher than the trimmed mean’s average rates over the past six or 12 months (1.5 percent and 1.6 percent, respectively).
One month’s trimmed mean data are, of course, not a very good indication of the underlying trend in PCE inflation; the trimmed mean’s six- and 12-month rates do a much better job of telling us where the trend is, and where the headline inflation rate may be headed. Those longer-horizon rates put the trend around 1.5–1.6 percent, and steady.
As regular readers of the Inflation Update know, our own rule-of-thumb forecast for headline PCE inflation over the coming 12 months is always the current 12-month trimmed mean rate. By that forecast, 12-month headline inflation—now 1.3 percent—should gradually rise toward 1.6 percent over the next 12 months.
Gasoline Pumps Up Headline Rate in February; Will Be a Drag in March
As we predicted last month—no real feat of prescience, since the data were almost all available at that point—the PCE price index for gasoline and other motor fuel increased 9 percent in February. That figure is not annualized; the annualized rate of increase was about 180 percent. February’s increase was the sharpest since June 2009 (though August 2012’s 8.9 percent deserves an honorable mention).
Other energy components also recorded increases, though none as sharp as that of gasoline. The price index for fuel oil increased 3 percent, natural gas services increased 1.2 percent, and electricity 0.3 percent. The price index for energy goods and services—which aggregates all these components, weighted by their shares of expenditure—increased 5.8 percent in February. Over the past 12 months, which include a number of sharp declines in gasoline prices, the index is up just 2.2 percent.
Gazing again into our crystal ball—that is, looking at the Department of Energy’s weekly data on the retail price of gasoline—March looks to reverse about half of February’s increase. Based on almost-complete data for the month, the average retail price of gasoline in March is tracking about 1.2 percent higher than in February. The Department of Energy’s data are not seasonally adjusted, and March typically brings a price increase of about 6 percent. A 1.2 percent increase when the normal seasonal increase is 6 percent implies a seasonally adjusted decline of 4.8 percent.
Given gasoline’s expenditure weight—around 3.8 percent—its expected 4.8 percent decline for March translates into a contribution of about –0.2 monthly percentage points to March’s headline inflation rate (or about –2.2 annualized percentage points). Barring big surprises in the non-gasoline components of PCE, we should thus expect March’s headline inflation rate to be near zero, and perhaps very slightly negative.
Prices of More-Processed Food Items Decline for Second Consecutive Month
Food prices increased at a 2 percent annualized rate in February, after being essentially unchanged in January. February’s increase is something of a return to recent form for food prices, which closed out 2012 with increases in the range of 2.5–3.0 percent in each of the final three months of the year.
Beneath the surface, though, February’s data show some continuity with January’s (and a discontinuity relative to the tail end of 2012). In particular, February, like January, featured a decline in the prices (on average) of more-processed food items. Our price index for more-processed food items declined very slightly in February, falling 0.5 percent at an annualized rate. This is, to be sure, a more modest decline than we saw in January (a 1.6 percent annualized drop), but the numbers for the two months look more similar to one another than either does to the readings we saw at the end of 2012. Our more-processed index averaged a 1.6 percent annualized rate of increase over the final three months of last year and posted rates of 2 percent or better in each of November and December.
As you might guess, then, February’s increase in overall food prices was driven by gains in price for items in the volatile less-processed category. Our index of less-processed food items increased at an 8.3 percent annualized rate in February, led by sharp increases in prices of fresh vegetables and fresh fruits (both up at annualized rates just over 23 percent).
Over the past six months, our less-processed index is up an annualized 3.9 percent, while our more-processed index is up just 0.6 percent. Prices for food as a whole are up an annualized 1.5 percent over that period.
Core Goods Prices Revert to Recent Form in February; Volatile Financial Components Weigh on Core Services Prices
After an unusually large increase in January, prices for core goods—true to their volatile form—fell noticeably in February, declining 1.2 percent at an annualized rate. Commenting on January’s increase in last month’s update, we noted that the increase (an annualized 3 percent) broke a long string of declines or, at most, very small increases. February’s data are thus back in line with that prior pattern. The price index for men’s and boys’ clothing—down 7 percent at an annualized rate—was the biggest-impact item among core goods, shaving 0.1 annualized percentage points off February’s headline inflation rate.
Over the past six months, our price index for core goods has declined 0.6 percent at an annualized rate. Over the past 12 months, the index is down about a quarter of a percent.
Prices for core services, meanwhile, posted a slightly more modest increase than we’d seen from them over the previous several months, increasing at a 1.3 percent annualized rate in February after averaging a 1.9 percent rate of increase over October–January.
Outsized price declines in the volatile financial services components dragged down our core services price index in February. The price indexes for the non-fee services of commercial banks (down an annualized 19 percent) and for the non-fee services of “other depository institutions and regulated investment companies” (down an annualized 28 percent) combined to subtract about three-quarters of an annualized percentage point off February’s headline inflation rate.
Movements in volatile components like financial services may help us understand why a particular month’s headline inflation rate came out as it did, but their signal value for thinking about the trend in consumer price inflation is essentially nil. More informative are movements in the less-volatile and heftier (by expenditure weight) components of core services, such as rent, owners’ equivalent rent (OER) and the price index for dining out (“other purchased meals”).
Among this “big three”—which combined add up to about 19 percent of overall PCE—only the price index for dining out posted a February number noticeably different from its recent past behavior. And while noticeable, the difference was nonetheless small—the index for other purchased meals increased at a 0.9 percent annualized rate in February, a bit below the index’s six-month average rate of 1.3 percent.
Meanwhile, rent and OER in February essentially matched their six-month performance. Rent increased at a 3 percent annualized rate in February, versus a 3.1 percent six-month rate; for OER, the corresponding rates are 2.3 percent and 2.2 percent.
Core services prices as a whole are up an annualized 1.7 percent over the past six months, and 1.8 percent over the past 12 months.
Share of Component Prices Falling, Rising Steady
Of the 178 components that potentially go into the trimmed mean, 57—or about 32 percent of the basket—registered price declines in February, about what we’d consider normal, based on data since the mid-1990s. The declining-price fraction has now been around 32 percent—give or take a percentage point—since last November.
Those percentages just count the number of price declines and divide by 178. When we weight items by their expenditure shares, about 23 percent of the basket fell in price in February, and about 77 percent increased in price. Those numbers are also similar to what we’ve seen over the past few months.
While the expenditure-weighted fraction of the PCE basket increasing in price changed little from January to February, February did see a shift within the set of increasing-price components, with a smaller share of components experiencing increases in the range of annualized 0–2 percent and a correspondingly larger share experiencing increases in the range of 2–3 percent.
March 29, 2013