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Behind the Numbers: PCE Inflation Update, November 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 rose a scant 0.3 percent at an annualized rate in November. Large declines in the prices of gasoline, men’s and boys’ apparel, air transportation and natural gas contributed to the very modest reading.

The headline index’s 12-month inflation rate remained below 1 percent for a third month, though it did inch up to 0.9 percent from 0.7 percent in October. The six-month headline inflation rate ticked down to an annualized 1.4 percent from 1.5 percent in October.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.5 percent in November, in line with its average annualized rate over the past six months. The 12-month trimmed mean inflation rate held steady at 1.3 percent, a level it has maintained for eight straight months now.

As regular readers of the Inflation Update know, the current 12-month trimmed mean inflation rate is our rule-of-thumb forecast for headline PCE inflation over the coming 12 months. We thus continue to expect that headline PCE inflation will accelerate from its current low level to an average 1.3 percent over the coming year.

More Drag From Energy Prices in November; December Likely to See a Boost

The PCE price index for gasoline and other motor fuel fell 1.7 percent in November, after falling 2.8 percent in October. Those declines are month-to-month percentage changes, not annualized rates. On a 12-month basis, gasoline prices are down 5.8 percent from November 2012.

November’s 1.7 percent decline—a bit larger than we had predicted, using weekly retail price data, in the last Inflation Update—shaved about 0.7 annualized percentage points off November’s headline inflation rate.

Other energy items recorded declines or very mild increases in November. The price index for natural gas services, which has been generally declining since spring, fell 1.8 percent. Fuel oil and electricity services posted small increases, 0.4 percent and 0.3 percent, respectively.

The prices of energy goods and services, taken as a whole, declined 1 percent in November, after falling 1.8 percent in October. For the 12 months through November, energy prices are down 2.7 percent.

At least as far as gasoline is concerned—and movements in gasoline prices almost always outweigh movements in the other components of energy—data available for the first three weeks of December point to a significant positive contribution to headline inflation when December’s PCE data are released. Based on Department of Energy (DOE) retail price data, the price of gasoline is on track for a 1.1 percent increase in December. Those DOE data are not seasonally adjusted. Taking account of the seasonal pattern in gasoline prices—December typically sees a 2.4 percent price decline—the seasonally adjusted change in the price of gasoline is tracking at 3.5 percent.

Assuming that projection is accurate, we can expect a contribution from gasoline to December’s headline rate of about 0.1 percentage points at a monthly rate, or about 1.4 annualized percentage points.

Food Prices Fall in November, Up Just 0.7 Percent Over the Past Year

Food prices as a whole—more formally, the PCE price index for “food and beverages purchased for off-premises consumption”—fell at an annualized rate of 1.3 percent in November. For the 12 months ending in November, food prices are up just 0.7 percent. Indeed, the last two years have seen remarkably low food price inflation—for the 24 months ending in November, food prices have increased at an annualized rate of just 1 percent.

November’s 1.3 percent annualized decline combined a sharp drop in prices for less-processed food items (down 5.7 percent at an annualized rate) and a negligible increase in prices for more-processed items (just 0.5 percent, annualized).

Fresh vegetables—among the most volatile components in PCE—led the decline in less-processed items, falling at a 21 percent annualized rate and subtracting about 0.1 annualized percentage points off November’s headline inflation rate. With just a few exceptions—processed dairy, processed fruits and vegetables, beer and spirits—the prices of more-processed food items were either down in November or up only slightly.

On a 12-month basis, our index of less-processed food items is up 2.7 percent, while our index of more-processed food items is down by about 0.1 percent.

A Sharp Drop in Core Goods Prices and a Pickup in the “Big Three”

Core goods prices fell by an annualized 2.5 percent in November, while core services prices rose an annualized 2.6 percent. The drop in core goods prices is the largest since December 2012. For the 12 months through November, core goods prices are down 0.9 percent.

Monthly core services inflation hit an annualized 2.6 percent as recently as June, but has been substantially lower more often than not—for the 12 months through November, our index of core services prices is up 1.8 percent.

Among core goods, the biggest-impact component in November was men’s and boys’ clothing, which declined at a 13 percent annualized rate and contributed about –0.1 annualized percentage points to November’s headline inflation rate. Among core services, the price indexes for air transportation (down an annualized 21 percent) and hotels and motels (up an annualized 50 percent) had both outsized movements and noticeable impacts on November’s headline rate, with contributions of –0.1 and 0.3 annualized percentage points.

In these calculations, a component’s contribution, or impact, is measured by asking how different the headline inflation rate would be if we were to exclude that component (and only that component) from the headline index. If taking out a component lowers the headline inflation rate by, say, 0.2 annualized percentage points, then we assess that component’s contribution as a positive 0.2 percentage points.

A component’s contribution depends on both its price movement and its weight in expenditure. Even an extreme price movement may still have a negligible impact, if the price movement is for an item with a negligible expenditure weight. Conversely, moderate price movements can mean big impacts when they come from components with hefty expenditure weights.

The “big three” core services components—our term for rent, owners’ equivalent rent (OER) and the price of dining out—fit the latter pattern, rarely experiencing outsized price swings, but with a combined expenditure weight of about 20 percent.
In November, two of the big three showed noticeable pickups. OER continued its recent pattern of acceleration, clocking in at a 3.2 percent annualized rate, its fastest pace since November 2008. The price index for dining out (“other purchased meals”) increased at a 2.6 percent annualized rate, well above its recent readings. The price index for dining out has averaged a 1.9 percent annualized rate over the past six months.

In contrast, rent, the third component of the big three, turned in a third consecutive modest rate of increase, 2.2 percent at an annualized rate. This follows increases of annualized 2.4 and 2.2 percent in September and October. For the year prior to September, rent growth had averaged a 3 percent rate of increase.

Acceleration in OER and dining out, plus little change in the rate of increase for rent, means a pickup in our “big three index,” which aggregates the three components into a single price index. That index increased at an annualized rate of 2.9 percent in November, up from 2.3 percent rates posted in September and October. Over the past six months, the index is up an annualized 2.5 percent. The big three index’s 12-month rate ticked up to 2.4 percent from 2.3 percent in October, a level at which it had been holding steady for six months.

—Jim Dolmas
December 23, 2013

 

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