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Behind the Numbers: PCE Inflation Update, February 2014

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 rose at a 0.9 percent annualized rate in February. Price declines for gasoline, women’s and girls’ clothing and air transportation made noticeable negative contributions to February’s headline inflation rate. As was the case in data for January, an increase in price for prescription drugs—11 percent at an annualized rate—made the most sizeable positive contribution to the headline rate. The price indexes for natural gas services and beef and veal also made significant positive contributions.

The six-month headline inflation rate held steady at an annualized 1.2 percent. The 12-month headline inflation rate dipped to 0.9 percent from 1.2 percent in January.

The Dallas Fed’s Trimmed Mean PCE inflation rate for February was an annualized 1.1 percent, similar to January’s (revised) 1 percent rate. The readings for both months are below the trimmed mean’s pace throughout 2013—for either the six or 12 months ending in December, the trimmed mean inflation rate was an annualized 1.4 percent. Through February, the trimmed mean’s six- and 12-month rates are both 1.3 percent.

Regular readers of the Inflation Update know that the current 12-month trimmed mean rate is our rule-of-thumb forecast for headline inflation over the coming 12 months. We thus expect headline PCE inflation to average 1.3 percent over the next 12 months.

Gasoline Prices Still a Drag on Headline Inflation

Prices for energy goods and services, as a whole, were a drag on headline inflation in February, as price declines for gasoline and electricity services more than offset price increases for fuel oil and natural gas.

At a seasonally adjusted monthly rate, gasoline prices fell 1.7 percent in February, after falling 0.9 percent in January. Gasoline prices are down 7.4 percent from February 2013. Electricity prices fell 0.2 percent after rising 1.8 percent in January. Prices for fuel oil (up 4.1 percent) and natural gas (up 3.6 percent) posted February increases similar to what we saw from those series in January.

Taken together, prices for energy goods and services fell 0.4 percent in February after increasing 0.4 percent in January. The price index for energy goods and services is down 2.3 percent from last February.

Anticipating the release of PCE data for March, we know from weekly Department of Energy (DOE) data that gasoline prices rose in March, though by less than what the normal seasonal pattern of gas prices would dictate. In particular, the DOE data show gasoline prices on track for a 4.7 percent increase in March. That may seem like a large one-month gain, but the normal seasonal price change we would expect in March is a 6.9 percent increase. Thus, on a seasonally adjusted basis—which is what matters for the PCE—gasoline prices are on track for a 2.2 percent decline in March, roughly similar to February’s 1.7 percent drop.

In February, gasoline contributed –0.7 annualized percentage points to the headline PCE inflation rate (in the sense that a headline index excluding only gasoline would have increased at an annualized rate 0.7 percentage points higher than the 0.9 percent rate we actually observed). Given that March is on track for a similar-sized decline in gasoline prices, we can expect a negative contribution comparable to February’s –0.7 percentage points when PCE data for March are released.

Food Prices Up on Jumps in Prices of Less-Processed Items

As noted above, the price index for beef and veal—up at an annualized rate of 60 percent in February—was among the biggest-impact items for headline inflation in February. In fact, beef and veal prices alone contributed roughly 0.2 annualized percentage points to February’s headline inflation rate. A number of other less-processed food categories showed sharp increases in February, particularly fresh fruit (up at a 34 percent annualized rate) and eggs (up at a 30 percent annualized rate).

Prices for food as a whole, though, increased at an annualized rate of 3.3 percent in February, as the robust price gains among less-processed food items were partially offset by declines in prices of more-processed food items. While our index of less-processed food items increased at an annualized rate of 14 percent in February, our index of more-processed food items fell at an annualized rate of 0.7 percent. The PCE price indexes for cereals and bakery products, sugar and sweets, beverages (both alcoholic and non-alcoholic), and “other meats” all experienced declines in February.

Over the past 12 months, prices for food as a whole are up 0.7 percent. Over the same period, prices for less-processed food items are up 2.5 percent, while prices for more-processed food items—which we think are more informative about the underlying trend in consumer price inflation—are essentially unchanged.

Medical Care Contributing to Slower Growth in Core Services Prices

Prices for core goods fell an annualized 0.4 percent in February, while prices for core services rose an annualized 1.6 percent. These numbers are roughly in line with core goods’ and services’ average behavior of late—for the 12 months ending in February, core goods prices are down 0.8 percent and core services prices are up 1.8 percent.

Among core goods, February saw notable price declines for women’s and girls’ clothing (down an annualized 10.8 percent), furniture (down an annualized 12 percent) and jewelry (down an annualized 11 percent). These three categories combined to shave roughly 0.4 annualized percentage points off February’s headline inflation rate. At the other end of the spectrum, the only big-impact item among core goods was the price index for prescription drugs. As we noted above, prescription drug prices rose an annualized 11 percent in February. This follows an annualized increase of 7.4 percent in January. Together, the gains over the two months more than erase the steep 9.5 percent annualized decline we saw in prescription drug prices in December.

While prescription drug prices helped push medical care goods prices up at an annualized rate of 2.2 percent in February, prices for medical care services were close to unchanged, increasing at just a 0.4 percent annualized rate. This comes after a 0.5 percent annualized rate of decline in January. On a 12-month basis, the PCE price index for medical care services is up just 0.8 percent—a decades-long low.

The 12-month rate of increase in medical care services prices has slowed from 1.7 percent in June 2012 to 0.8 percent currently. Over the same span of time, 12-month core services inflation has slowed by 0.6 percentage points, from 2.4 percent to 1.8 percent. With medical care having an expenditure weight of about 26 percent within core services, the slower rate of increase in medical care services prices accounts for roughly 40 percent of the deceleration in core services prices since mid-2012.

What about our “big three” core services—rent, owners’ equivalent rent (OER) and the price index for dining out (more formally, “other purchased meals”)? These three components together add up to about 30 percent of core services spending and are among the least volatile components in the entire PCE basket. We thus think of them as particularly informative about underlying trends in core services inflation.

Two of the three components—rent and OER—showed more modest rates of increase in February compared with January, while “other purchased meals” showed a very noticeable pickup. Rent increased at a 2.3 percent annualized rate in February, compared with a 2.7 percent rate in January. For OER, the corresponding numbers are 2.1 percent for February versus 2.5 percent for January. On a 12-month basis, rent and OER are up 2.8 percent and 2.5 percent, respectively.

Meanwhile, the price index for other purchased meals increased at a 3.6 percent annualized rate in February, its fastest one-month pace since last April, and well above its one-month rate in January (1.1 percent) and its average rate of increase over the past 12 months (2.2 percent).

The pickup in the price of dining out more than offset the slower rates for the shelter components—our “big three index,” an aggregate of just these three components, increased at a 2.5 percent annualized rate in February, up from a 2.2 percent rate in January. The index’s 12-month rate was also 2.5 percent in February, identical to its reading in January.

—Jim Dolmas
March 28, 2014

 

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