Behind the Numbers: PCE Inflation Update, October 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 price index fell at a 0.4 percent annualized rate in October, weighed down by a 2.8 percent decline in the price index for gasoline and other motor fuel. That 2.8 percent decline in the price of gasoline—roughly what we expected in the last Inflation Update—is not annualized. The annualized rate of decline was about 30 percent. Gasoline alone shaved 1.2 annualized percentage points off October’s headline inflation rate in the sense that a PCE price index excluding gasoline—and only gasoline—would have increased at a 0.8 percent annualized rate in October.
Other components with outsized price movements and big impacts on the headline inflation rate include the price indexes for: hotels and motels, women’s and girls’ clothing, nonprofit hospitals and jewelry (with a combined contribution of nearly –0.9 annualized percentage points); and the expenditures of nonprofit institutions serving households, prescription drugs and pension fund services (with a combined contribution of about +0.7 percentage points).
The 12-month headline inflation rate inched further below 1 percent, ticking down to 0.7 percent in October from 0.9 percent in September.
The Dallas Fed’s Trimmed Mean PCE inflation rate, which excludes all outsized price swings, regardless of the commodity or service involved, increased at a 0.8 percent annualized rate in October, the lowest rate of increase since a –0.5 percent reading in April.
In spite of October’s weak reading, the trimmed mean’s six-month inflation rate increased from an annualized 1.3 percent to 1.5 percent. This is one of those instances where the change in the six-month rate has less to do with the latest monthly data point and more to do with what was going on six months ago. In particular, six-month trimmed mean rates from April through September included April and its –0.5 percent annualized decline. That observation dropped out of the calculation in October.
The 12-month trimmed mean rate—a model of stability—held steady at 1.3 percent for a seventh consecutive month. Consequently, our rule-of-thumb forecast for average headline PCE inflation over the next 12 months also held steady at 1.3 percent.
Energy Price Declines Continue to Pull Down Headline Inflation Rate
In addition to the 2.8 percent decline in the price index for gasoline, noted above, the indexes for fuel oil (–0.6 percent) and natural gas (–1 percent) also declined. The price index for electricity services rose a modest 0.1 percent. Prices for energy goods and services as a whole declined 1.7 percent in October and are down 5 percent from October 2012. Since the end of 2011, energy prices have increased at an average annualized rate of just 0.2 percent.
Gasoline prices fell further in November, though the size of the decline and its impact on headline inflation should be about one-third the size and impact we saw in the October PCE data. According to weekly price data from the Department of Energy, the average retail price of gasoline, before seasonal adjustment, fell 2.8 percent in November. Once we take account of the normal seasonal variation in gasoline prices—November typically sees a 1.8 percent decline in price—we can expect a 1 percent seasonally adjusted decline when PCE data for November are released.
A seasonally adjusted decline of that magnitude, given gasoline’s 3.3 percent expenditure weight, translates into a small contribution to November’s headline inflation rate of –0.03 monthly percentage points, or about –0.4 annualized percentage points.
Tame Food Price Inflation Continues in October
Food price inflation continued at a very modest pace in October, with prices for all food items, taken together, rising just 0.7 percent at an annualized rate.
The modest price rise comes in spite of a sharp 7.7 percent annualized rate of increase in prices for less-processed food items. A 12.5 percent annualized increase in prices for fresh fruit, which represents just under 4 percent of food expenditures, led the upward charge in the less-processed group.
Offsetting the increases in the price of the less-processed items was a 1.9 percent annualized decline in prices for more-processed food items. Bakery products, down 10 percent at an annualized rate, were the main drag on our index of more-processed food products. With an expenditure weight of 10 percent within food and roughly 1 percent within overall PCE, bakery products shaved about an annualized percentage point off food price inflation in October and about a tenth of an annualized percentage point off headline inflation.
The 12-month rate of increase in overall food prices ticked down to 1 percent in October from 1.2 percent in September. October’s 12-month rate of 1 percent reflects 12-month rates of increase in less-processed and more-processed food items of 3.5 percent and 0.1 percent.
Prices for Core Goods, Core Services Maintain Recent Trends
Core goods prices fell at a 0.8 percent annualized rate in October, while core services prices increased at a 1.5 percent annualized rate. For the 12-month period ending in October, core goods prices are also down 0.8 percent, and core services prices are up 1.8 percent. October’s numbers for core goods and services prices are thus pretty much in line with these components’ recent past.
As we’ve noted on several occasions in the Inflation Update, the negative core goods inflation rate is not unusual—in fact it’s the historical norm, with core goods prices declining at an average annualized rate of about 0.4 percent over the past 20 years. The difference between core goods’ recent rate of –0.8 percent and their longer-term rate of –0.4 percent is relatively minor, especially given the volatility in core goods prices.
More significant is the difference between the recent rate of increase in core services prices, 1.8 percent over the past 12 months, and their longer-term average, about 2.5 percent over 20 years.
Among core goods, the biggest-impact price changes in October were in women’s and girls’ clothing (down 9.7 percent at an annualized rate) and jewelry (down 19.8 percent at an annualized rate). Those two components together contributed about –0.3 annualized percentage points to October’s headline inflation rate. Prescription drug prices made a noticeable positive contribution, about 0.14 annualized percentage points, on the strength of a 4.5 percent annualized rate of increase. The hefty increase in prescription drug prices represents a break with recent past behavior—for the 12 months ending in September, prescription drug prices were up just 0.4 percent.
The biggest-impact price changes among core services came from hotels and motels (down an annualized 38 percent for the month), nonprofit hospital services (down an annualized 3.7 percent) and the price index for the expenditures of nonprofit institutions serving households (up an annualized 19 percent). The positive and negative contribution to headline inflation from the three components were roughly offsetting, with the two decliners contributing about –0.5 annualized percentage points against a 0.4 percentage point contribution from the nonprofit expenditures price index.
Last, our “big three index”—an aggregate of the three components of core services combining the biggest expenditure weights and the lowest volatility: rent, owners’ equivalent rent (OER) and the price index for dining out—increased at a 2.3 percent annualized rate in October, right in line with its 12-month rate, also 2.3 percent.
As was the case in September, rent and the price index for dining out posted one-month gains that were a bit slower than their recent rates of increase. Rent increased at a 2.2 percent annualized rate in October, compared with a 12-month rate of 2.8 percent. The price index for dining out increased at a 1.6 percent annualized rate, compared with a 1.9 percent rate over the past 12 months.
OER, meanwhile, posted a second consecutive increase of annualized 2.7 percent, above its current 12-month rate of 2.3 percent.
Fewer Price Increases in October
The share of PCE components experiencing price increases declined in October. Weighting components by their expenditure shares, the fraction of the PCE basket rising in price was 65 percent in October versus 73 percent in September.
In terms of the distribution of price increases—for which our trimmed mean PCE webpage (www.dallasfed.org/research/pce/index.cfm) has a nice chart—the decline in the number of rising-price components mainly affects the fraction of the basket increasing at annualized rates of 2–3 percent. The fraction of the basket with price increases in that range declined from about 27 percent to about 17 percent. The fraction of the basket experiencing price increases at annualized rates of 0–2 percent or better than 3 percent was little changed from September.
A smaller number of price increases means a larger number of price declines, naturally. Weighted by expenditure shares, the fraction of falling-price components in the basket was 35 percent in October. Unweighted—just counting how many declines among the 178 components—the falling-price share was 42 percent. Historically, falling-price shares above 40 percent used to be rare, but have become more common over the past five years.
December 9, 2013