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Behind the Numbers: PCE Inflation Update, July 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 PCE inflation rate for July was an annualized 1.1 percent, down from a 5 percent annualized rate in June. The Dallas Fed’s Trimmed Mean PCE inflation rate—typically less volatile than the headline rate—was an annualized 1.4 percent in July, compared with a 2.2 percent rate in June.

On either a six- or 12-month basis, the headline and trimmed mean rates are now identical. The six-month rates for both are an annualized 1.3 percent for July. July’s six-month rate represents a 0.1 percentage point step up from June for the headline index, and a 0.1 percentage point step down for the trimmed mean. Both indexes’ 12-month rates ticked up to 1.4 percent in July from 1.3 percent a month earlier.

As we have often noted in the Inflation Update, our personal rule-of-thumb forecast for headline PCE inflation over the coming 12 months is the current 12-month trimmed mean rate. The logic behind our rule of thumb is that (a) the current 12-month trimmed mean rate is a good indicator of the current trend rate of headline inflation, and (b) the headline inflation rate tends to gravitate toward its trend. Given that the current 12-month trimmed mean and headline rates are lined up at 1.4 percent, we could say that the headline rate is already at our rule-of-thumb estimate of its trend. Our forecast is thus for the headline rate to average 1.4 percent over the coming 12 months, just as it has over the previous 12 months.

Energy Prices Up Modestly in July; Gasoline Likely to Have Little Impact in August

Gasoline had a somewhat bigger impact on July’s headline inflation rate than we had predicted in last month’s update. We had expected a 0.4 percent seasonally adjusted increase (at a monthly rate) and a contribution to the headline inflation rate of about 0.2 annualized percentage points. Instead, we got a 1 percent increase and a 0.4 percentage point contribution.

Gasoline’s positive contribution to the headline inflation rate was muted substantially by a large negative contribution from natural gas services. The price index for natural gas services fell 2.9 percent in July and shaved about 0.2 annualized percentage points off July’s headline inflation rate.

July’s decline in price for natural gas only partially reverses a string of recent price increases. For the 12 months ending in July, the price index for natural gas is up 8.8 percent. This is quite a difference from a year ago: For the 12 months ending in July 2012, the index was down roughly 13 percent.

Electricity services also fell slightly in price in July (0.4 percent), while fuel oil rose at a rate comparable to gasoline (1.1 percent). The price index for energy goods and services as a whole increased 0.3 percent in July and is up 4.8 percent on a 12-month basis.

Undaunted by our erroneous prediction for July’s gasoline price impact, we will hazard a guess for August, based—as always—on weekly data from the Department of Energy. Those data show gasoline prices down a bit more than 0.4 percent in August compared with July. As it turns out, a 0.4 percent decline is the typical seasonal price change for August. Thus, we can expect August PCE data—which use seasonally adjusted prices—to show at most a negligible change in the price of gasoline and a correspondingly negligible contribution to headline inflation.

Fresh Produce Boosts Food Index in July

Food prices increased at a 1.3 percent annualized rate in July, as an 8.1 percent annualized rate of increase in prices of less-processed food items more than outweighed a 1.3 percent rate of decline in prices of more-processed items.

Our index of less-processed-food prices, in turn, was boosted by a sharp increase—about 26 percent at an annualized rate—in the prices of fresh produce. Among more-processed items, price declines for cereals and bakery goods, sugar and sweets, nonalcoholic beverages and “other meats” more than offset price increases in alcoholic beverages, processed fruits and vegetables, and “food products not elsewhere classified.”

Food prices as a whole are up 1.2 percent from a year ago, with less-processed items up 2.8 percent and more-processed items up just 0.5 percent.

Core Goods Prices Fall, Core Services Prices Up at Moderate Pace

After posting unusually rapid rates of increase in June, prices for both core goods and core services registered more modest rates in July. Following a 2 percent annualized rate of increase in June, our index of core goods prices posted a trend-like 0.5 percent rate of decline in July. Our index of core services prices—which had increased at an annualized 3.1 percent rate in June—increased at a 1.5 percent rate in July.

For the 12 months ending in July, core goods prices are down 0.7 percent, while core services prices are up 1.9 percent.

Among core goods going up in price, the biggest-impact items in July were women’s and girls’ clothing (up an annualized 29 percent), tobacco (up 18 percent) and prescription drugs (just under 6 percent). Big-impact decliners included men’s and boys’ clothing (down an annualized 13 percent), dishes and flatware (down 43 percent), and major household appliances (down 18 percent).

Among core services, only one item—air transportation services, up in price at a roughly 39 percent annualized rate—registered both an outsized price movement and a significant impact. (An item’s “impact” is something we judge by asking, counterfactually, how different the headline inflation rate would be if we excluded just that particular item from the index. Impact depends on both the size of the item’s price movement and the item’s weight in expenditure. Railroad transportation services, for example, experienced a larger price increase in July than did air transportation services but had only a negligible impact, owing to its tiny weight—just 0.01 percent of expenditure versus 0.5 percent for air transportation.)

For the past few Inflation Updates, we’ve been tracking inflation in what we’ve dubbed the “big three” core services—rent, owners’ equivalent rent (OER) and the price index for dining out (“other purchased meals”), which together add up to about 30 percent of core services expenditure (and about 20 percent of overall PCE). Our interest in them is based in part on their hefty weight, but also on their smoothness, or lack of volatility (though “smooth three” didn’t have, to our ear, quite as nice a ring). Apart from a few very small items, these are the three components most often included in the trimmed mean.

Rent posted an annualized 2.9 percent rate of increase in July, up from a 2.5 percent rate in June, and just about in line with its 12-month rate of increase, 2.8 percent. OER increased at a 1.8 percent annualized rate in July, compared with a 2.2 percent annualized rate in June and a 2.2 percent rate over the past 12 months. The 12-month rates for both have been quite stable for over a year, with the rate for OER between 2 and 2.2 percent, and that for rent between 2.7 and 2.9 percent, since last spring.

The price index for dining out recorded a 1.9 percent annualized rate of increase in July, in line with its 12-month rate, also 1.9 percent. The index’s 12-month rate has generally drifted down—smoothly!—since last September, shedding about a full percentage point over that span.

A price index consisting of just the “big three” would’ve increased at a 2 percent annualized rate in July and would be up 2.3 percent for the 12 months ending in July (identical to its rate for the 12 months ending in June).

—Jim Dolmas
September 3, 2013


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