Behind the Numbers: PCE Inflation Update, April 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 price index fell at an annualized rate of 3 percent in April on the heels of a 1.4 percent annualized rate of decline in March. A steep decline in the price index for gasoline and other motor fuel—8.1 percent at a monthly rate or about 64 percent annualized—was the biggest drag on the headline index. Gasoline and other motor fuel contributed about –3.5 annualized percentage points to April’s headline rate, in the sense that an index of all items except gasoline and motor fuel would have increased at an annualized rate of about 0.5 percent.
As we expected in last month’s Inflation Update, the 12-month headline inflation rate has now dipped below 1 percent, falling to 0.7 percent in April from 1.0 percent a month earlier. The six-month headline rate fell to an annualized –0.1 percent from 0.7 percent in March.
Similar to last month, while gasoline was the main culprit behind the decline in the headline index, it must have many accomplices since our Dallas Fed trimmed mean inflation rate—which excludes all extreme price swings—posted a –0.1 percent annualized rate in April. A monthly change that annualizes to just a tenth of a percent is, for all practical purposes, effectively zero (before annualizing, the trimmed mean inflation rate for April was –0.01 percent); even so, April’s reading is the first negative trimmed mean rate we’ve seen in the history of the series, which begins in 1977. (And if we take it to be zero, it’s one of just a handful of zeroes in the history of the series, with the others clustered between December 2009 and October 2010.)
Corroborating evidence for the “many accomplices” theory can be found in the fraction of components in our PCE basket that experienced declines in April. Of the 178 components that potentially go into the trimmed mean, 44 percent experienced declines in April, which is high by historical standards. More striking, when components are weighted by their shares of expenditure, we also find that 44 percent of the basket declined in price—a level reached only a few times, between mid-2009 and mid-2010.
In any case, it’s safe to say that April was characterized by extremely weak consumer price inflation.
The six-month trimmed mean inflation rate dipped to an annualized 1.1 percent from 1.3 percent in March. The 12-month trimmed mean rate ticked down to 1.3 percent from 1.4 percent. Consequently, our rule-of-thumb forecast for headline PCE inflation over the coming 12 months (which is just the trimmed mean inflation rate over the previous 12 months) ticks down to 1.3 percent as well.
Gasoline Prices Down Sharply in April; On Pace for a Negligible Impact in May
As noted above, the PCE price index for gasoline and other motor fuel fell 8.1 percent in April, close to our forecast in last month’s Inflation Update (where we projected an 8.2 percent decline). Among other energy goods and services, fuel oil posted a 4.4 percent decline and natural gas services posted a 4.4 percent increase. For natural gas, April’s jump is the largest monthly gain since July 2008. The price index for electricity services—always more stable than the other energy components—increased 0.5 percent.
Taken as a whole, the prices of energy goods and services declined 4.4 percent in April and are down 4.2 percent from April 2012.
Looking ahead to next month’s release, movements in the price of gasoline over the past few weeks suggest that, while gasoline will not be a serious drag on May’s headline inflation rate, we also should not expect any serious boost from gasoline prices. Weekly retail price data from the Department of Energy show gasoline prices on track for a roughly 0.7 percent increase from April to May. As it turns out, 0.7 percent is about in line with the estimated seasonal increase in gasoline prices for May, which is 0.8 percent. In other words, the increase in gasoline prices that we’re on track to record for May is about what we would’ve expected simply from normal seasonal variation in gasoline prices. The seasonally adjusted price change—which is the form that matters for calculating PCE inflation—should be about zero.
Overall Food Prices Up Modestly
Food prices increased at a 1.1 percent annualized rate in April, similar to March’s 0.8 percent rate of increase. Over the past 12 months, food prices are also up 1.1 percent. Food price inflation, as measured by the 12-month change in overall food prices, has been remarkably stable of late, staying within a range of 0.9–1.2 percent since last September.
April’s 1.1 percent annualized rate of increase combines very divergent movements in the prices of less-processed food items (down an annualized 6.5 percent) and more-processed food items (up an annualized 4.3 percent). Among less-processed items, fresh vegetables—down at a roughly 24 percent annualized rate—had the biggest impact on April’s headline inflation rate, subtracting about 0.1 annualized percentage points. Among more-processed items, “other meats” (think hot dogs, sausage, etc.), wine and “food products not elsewhere classified” (the PCE home for snack foods, soups, prepared meals and the like) experienced notable price increases. The latter of these—which has an expenditure share of just over 1 percent—added about a tenth of an annualized percentage point to April’s headline inflation rate.
The 4.3 percent annualized increase in prices for more-processed items in April is the largest monthly gain since late 2011 and follows a 1.3 percent annualized increase in March. As regular readers of the Inflation Update know, we tend to think of movements in our index of more-processed food prices as indicative of the underlying trend in food price inflation. The six-month rate of increase in our more-processed index increased to an annualized 1.3 percent in April from 0.7 percent in March, while the index’s 12-month rate increased to 0.5 percent from 0.2 percent.
Core Goods Prices Down Again, Core Services Unusually Soft
Outside of food and energy, prices for core goods declined at a 1.8 percent annualized rate in April (following a 2.1 percent rate of decline posted in March), while prices for core services increased at a very modest 0.8 percent annualized rate (following a 1.7 percent rate in March). On a six-month basis, our index of core goods prices is down an annualized 1.2 percent, and our index of core services prices is up an annualized 1.7 percent. The 12-month rates for the two indexes are –0.7 percent and 1.7 percent, respectively. Both 12-month rates are as low as we’ve seen them since the first half of 2011.
As usual, the prices of components in core goods—generally much more volatile than the prices for core service items—recorded a mix of outsized increases and decreases. Women’s and girls’ clothing (down at a roughly 13 percent annualized rate in April), men’s and boys’ clothing (up at a 14 percent rate) and new light trucks (up at a 6.7 percent rate) all had impacts on April’s headline inflation rate in excess of 0.1 annualized percentage points (in absolute terms).
Given the volatility in goods prices, April’s 1.8 percent rate of decline in our core goods index, while steep, is not especially unusual (nor would its opposite be)—annualized monthly rates either below –1.8 percent or above +1.8 percent have been realized just over 40 percent of the time since the mid-1990s.
The modest 0.8 percent annualized rate posted by our index for core services is more surprising. One-month increases at or below that rate have occurred only about 3 percent of the time since the mid-1990s.
There were, of course, outsized movements and big impacts among core services—notably the price indexes for nonprofit hospital services (down an annualized 7.7 percent) and air transportation services (down an annualized 24 percent). Those two components together subtracted just under 0.4 annualized percentage points off April’s headline inflation rate.
Still, the softness in services is striking when one considers the behavior of the largest, least volatile service components—rent, owners’ equivalent rent (OER) and the price index for dining out (“other purchased meals”). To be sure, rent growth was softer in April, just 1.8 percent annualized, down from 3 percent in March and compared with an average 2.7 percent over the past 12 months. But, OER posted a 2.3 percent annualized increase (up from 1.8 percent in March), while the price index for dining out posted a whopping 4.4 percent rate (its fastest one-month pace since April 2011 and well above its 12-month rate of 2.2 percent).
A price index made up of just those three components—which, by expenditure weight, amount to about 30 percent of core services and about 19 percent of overall PCE—would have increased at a 2.7 percent annualized rate in April. The implication—with a little back-of-the-envelope math—is that everything in core services apart from those three components, on average, or as a whole, posted a roughly zero percent change in April.
May 31, 2013