Behind the Numbers: PCE Inflation Update, March 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 March was –1.6 percent at an annualized rate. This comes on the heels of a robust 4.8 percent annualized rate in February. In both cases, swings in the price of gasoline were major drivers, as a 9 percent price increase in February was followed by a 4.2 percent decline in March. Weekly data on gasoline prices in April point to an even larger decline in price—and most likely another negative monthly headline inflation rate—when PCE data for April are released.
The six-month headline inflation rate dropped to 0.7 percent in March from 1.6 percent in February, while the 12-month headline inflation rate dipped to 1 percent, from 1.3 percent a month earlier. With April’s headline reading likely to be negative, the 12-month headline rate will, in all likelihood, slip below 1 percent in next month’s release.
Gasoline could not have been the only drag in March, though, as the Dallas Fed’s trimmed mean PCE inflation rate—which abstracts from all large price swings, whether from energy, food, or other items—was a modest 1.0 percent, annualized. This follows an annualized 1.7 percent rate in February and is a bit below the trimmed mean’s six- and 12-month rates.
The trimmed mean’s six-month inflation rate ticked down to an annualized 1.3 percent in March, from 1.5 percent in February. The 12-month trimmed mean rate also inched down, to 1.4 percent from 1.5 percent a month earlier. The 12-month trimmed mean rate has shed 0.7 percentage points since hitting a post-recession peak of 2.1 percent in January 2012.
The most recent 12-month trimmed mean rate continues to be our favorite rule-of-thumb forecast for headline inflation over the coming 12 months. We thus expect the 12-month headline rate—currently 1.0 percent—to rise toward 1.4 percent over the coming year.
Gasoline Weighs Down Headline Rate; Larger Decline in the Pipeline
While we expect the 12-month headline rate to eventually move back toward the 12-month trimmed mean rate, we also know that that process is not likely to begin in next month’s data. At this point, we have fairly complete data on gasoline prices in April, and those data point to another significant drag from gasoline. As a result, the 12-month headline inflation rate should dip once more when PCE data for April are released.
Before looking ahead to the next release, though, we should address the impact of gasoline and other energy items in today’s release. As we noted above, the price index for gasoline (and other motor fuel) declined 4.2 percent in March, on a seasonally adjusted basis. That 4.2 percent decline is not annualized—the annualized rate of change was roughly –40 percent. Gasoline alone subtracted about 1.9 annualized percentage points from March’s headline inflation rate, in the sense that a PCE index of all items other than gasoline would have posted a 0.3 percent annualized increase in March, rather than a 1.6 percent annualized decline.
Price movements for other energy goods and services were mixed, with fuel oil and electricity declining (2.1 percent and 0.6 percent, respectively), while the price of natural gas increased (1.0 percent). The price index for energy goods and services as a whole declined 2.7 percent in March and is down 1.6 percent for the 12 months ending in March.
Looking ahead now to April, weekly retail price data from the Department of Energy show gasoline prices on track to decline 3.4 percent from March. That figure is not seasonally adjusted—the expected decline in gasoline prices is even sharper when we take into account the typical seasonal pattern in gasoline prices. For the past few years, a typical April would feature a seasonal price increase of about 4.8 percent. A 3.4 percent decline, when the normal seasonal pattern calls for a 4.8 percent increase, implies a seasonally adjusted decline of 8.2 percent. Given gasoline’s weight in expenditure (about 3.5 percent), an 8.2 percent decline in price would subtract about 0.3 monthly percentage points off April’s headline inflation rate (or about 3.4 annualized percentage points).
It thus seems reasonable to presume that April’s headline inflation rate will be negative. For this not to be the case, prices for everything other than gasoline, taken as whole, would need to rise at a better than 3.6 percent annualized rate. That would be quite a surprise, given recent rates of PCE inflation outside of gasoline.
Food Prices Mostly Tame
Food prices were largely a nonfactor in March: the PCE price index for food as a whole increased at a 0.8 percent annualized rate, compared with a 2.0 percent annualized rate of increase in February. Food prices are up an annualized 1.8 percent over the past six months, and 1.1 percent over the past 12 months.
The underlying detail was mixed, with prices for less-processed items down very slightly and prices for more-processed items up modestly. Our index of less-processed food prices declined by an annualized 0.6 percent, pulled down by declines in price for fresh milk and fresh fruits and vegetables.
Our index of more-processed food prices increased at a 1.3 percent annualized rate, as gains in prices of bakery products, alcoholic beverages and “food products not elsewhere classified”—which contains snack foods, a number of canned foods and other prepared meals—offset declines in other components.
Our more-processed price index, which does a bit better at capturing the trend in food price inflation then either food as a whole or the less-processed price index, is up an annualized 0.7 percent over the past six months and just 0.2 percent over the past 12 months.
Core Goods Prices Down Again, Core Services Prices Grow Modestly
Similar to what we saw in February’s data, prices for core goods posted another somewhat large decline in March, while prices for core services posted a modest increase.
Our index of core goods prices fell at an annualized rate of 2.1 percent in March, following a 1.3 percent rate of decline in February. The volatile category of women’s and girls’ clothing—down an annualized 16 percent in March—made the biggest impact among core goods components, subtracting a bit more than a quarter of an annualized percentage point from March’s headline inflation rate. Two catch-all categories—“clocks, lamps, lighting fixtures and other household decorative items” and “sporting equipment, supplies, guns and ammunition”—also experienced outsized, large-impact price declines, with each subtracting about 0.1 annualized percentage points from March’s headline inflation rate.
At the other end of the spectrum, prescription drug prices—up an annualized 3.4 percent—added about 0.1 annualized percentage points to the headline inflation rate. That 3.4 percent increase is the first sizeable gain in prescription drug prices since an annualized 5.9 percent increase last August; in the intervening six months, prescription drug prices had been generally in decline, falling at an annualized rate of 2.3 percent.
Core goods prices, as a whole, are down an annualized 0.8 percent over the past six months and down 0.5 percent over the past 12 months.
Prices for core services, meanwhile, posted a 1.3 percent annualized increase in March, following a 1.6 percent increase in February. March’s 1.3 percent rate is somewhat more modest than the rates we had been seeing over the prior several months. The six- and 12-month inflation rates for core services are currently 1.8 and 1.7 percent, respectively.
Among core services recording outsized price movements, a couple components of financial services were (once again) among the items having the biggest impact. Both components are price indexes for financial services provided to consumers without explicit fees (so the “price” consumers pay takes the form of lower interest on deposits); one is for the services provided by commercial banks, the other for the services of “other depository institutions and regulated investment companies.” Together, these two components combined to subtract about a quarter of an annualized percentage point off March’s headline inflation rate.
Regular readers of the Inflation Update will know that these volatile financial services components often show up in our list of the biggest-impact items among core services. Well, their days of showing up on that list may be numbered—the calculation of the prices for these “services furnished without payment” is one of the subjects of the Bureau of Economic Analysis’ (BEA) forthcoming comprehensive revision to the National Income and Product Accounts. Comprehensive revisions take place every four or five years—the last was in 2009—and are incorporated into PCE data with the release of data for June. We’ll have more to say about the revision as we get closer to it (and certainly after the June PCE release), but for now, interested readers can learn more at BEA’s website: http://www.bea.gov/national/an1.htm#2013comprehensive.
Rent Growth Steady, Growth in Price of Dining Out Has Slowed
As we’ve noted before, looking at components with outsized price movements can tell us something about why this month’s headline rate turned out as it did, but the components that matter most for the underlying trend in the headline rate are those with big expenditure weights and low volatility. Among core services, that’s basically a description of rent, owners’ equivalent rent (OER) and the price index for dining out (formally, “Food services: other purchased meals”).
The PCE price index for rent increased at an annualized rate of 3.0 percent in March, following a 3.1 percent rate in February. The 12-month rate of increase in rent ticked up to 2.8 percent in March from 2.7 percent in February. Rent’s 12-month rate of increase has been steady in a narrow range of 2.6–2.8 percent for the past year.
OER increased at a 1.8 percent annualized rate in March, compared with a 2.3 percent rate in February. Like rent, OER has been quite steady on a 12-month basis for the past year, with 12-month rates of increase in a narrow 2.0–2.1 percent range.
The price index for dining out, up an annualized 2.2 percent in March, has been less rock-solid over the past several months. Its 12-month rate of increase was 3 percent as recently as last September, but has since shed 0.8 percentage points, coming in at 2.2 percent in March.
Jump in Number of Falling-Price Components
Finally, after several months of “normal” readings—historically, around 32 percent—the fraction of our 178 PCE components registering price declines jumped in March to 43 percent. What do we make of this jump? At this point, consistent with our frequent caveat against reading too much into one observation, we make very little of it, though we will be keeping a closer eye on this series in coming months.
April 29, 2013