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Behind the Numbers: PCE Inflation Update, April 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, or all-items, PCE price index rose at a 2.4 percent annualized rate in April, after increasing at a 2.3 percent rate in March. Some of the strength in April’s headline rate came from increases in volatile food and energy prices.

Food prices increased at an annualized rate of 3.7 percent in April, led for a third consecutive month by sharp increases in the prices of less-processed items. Within energy, a sharp increase in the price of gasoline—over 30 percent at an annualized rate—was partly offset by an equally sharp decline in the price of electricity. On net, prices for energy goods and services rose at a 4.9 percent annualized rate in April. Of April’s 2.4 percent headline rate, food and energy accounted for about 0.3 annualized percentage points.

While volatile food and energy prices certainly contributed to April’s stronger headline inflation reading, prices of core services also showed some strength in April, rising at a 2.6 percent annualized rate after increasing at a 2.9 percent rate in March. For the six months prior to that—that is, the six-month period ending in February 2014—core services prices had averaged a 2 percent rate of growth.

The Dallas Fed’s Trimmed Mean PCE inflation rate also points to a somewhat faster pace of underlying consumer price inflation over these last two months, posting an annualized rate of 2.5 percent in April, after recording a 1.9 percent rate in March. For the six months through February, the trimmed mean had averaged an annualized rate of 1.4 percent.

The 12-month headline PCE inflation rate increased to 1.6 percent in April from 1.1 in March. The 12-month trimmed mean rate also jumped to 1.6 percent in April, from 1.3 percent in March. For the trimmed mean, the increase in the 12-month rate reflects in small part the higher one-month rates recorded in March and April. More significant, though, is the waning influence, with the passage of time, of an unusual negative trimmed mean rate last April. Put differently, the jump in the 12-month trimmed mean rate has less to do with the index’s recent behavior than it does with the fact that a particularly low past reading is receding further into the past.

Still, and as always, the current 12-month trimmed mean rate is our favorite rule-of-thumb forecast for the behavior of the headline, or all-items, index over the next 12 months. We thus now expect headline PCE inflation to average 1.6 percent over the coming year.

Electricity Prices Decline, Gasoline Up in April

Gasoline prices rose 2.3 percent in April (monthly rate), a bit less than the 2.7 percent increase we predicted in last month’s Inflation Update. Gasoline alone contributed 0.8 annualized percentage points to April’s headline inflation rate, but, as noted above, much of that positive contribution was offset by a decline in the price of electricity services, which were down 2.6 percent in April compared with March. Given electricity’s smaller weight in expenditure (compared with gasoline), that 2.6 percent decline shaved about 0.5 annualized percentage points off the headline inflation rate.

Among other energy components, the price of fuel oil fell 3 percent in April, while the price of natural gas services rose 0.3 percent. All these changes are at monthly rates—that is, not annualized.

Looking ahead to the next PCE release, weekly data from the Department of Energy (DOE) show gasoline prices increased modestly in May, just 0.4 percent. The DOE data are not seasonally adjusted, but the normal seasonal effect for May is small. A typical May sees a slight decrease in gasoline prices, a bit less than 0.1 percent. Thus, on a seasonally adjusted basis, we expect to see an increase in gasoline prices of just under 0.5 percent in the next PCE release, less than a quarter the size of April’s gain.

Over the past 12 months, prices for energy goods and services as a whole are up 5.2 percent, reflecting a 5.8 percent increase in gasoline prices, a 3.7 percent increase in fuel oil prices, and increases in the prices of electricity and natural gas services of 2.3 percent and 10.6 percent, respectively.

Less-Processed-Food Prices Continue to Surge

Prices for less-processed food items increased sharply for a third consecutive month. Our index of less-processed-food prices increased at a 13.8 percent annualized rate in April. This follows annualized rates of about 14 percent in February and March. Rising meat prices have been a main driver of the increases in the less-processed index. At a monthly rate—not annualized—prices for beef and veal rose 3 percent in April, while prices for pork rose 4.1 percent. Since April 2013, those two categories are up 11.1 percent and 9.2 percent, respectively, with most of the gains coming in the past three months.

Slow growth in prices of more-processed food items—which make up over 70 percent of consumer expenditure on food—tempered the impact of less-processed items on overall food price inflation. Our index of more-processed-food prices was essentially unchanged in April, falling by less than 0.1 percent at an annualized rate, after posting an annualized rate of 2.4 percent in March.

Prices for food as a whole increased at a 3.7 percent annualized rate in April. Over the past 12 months, food prices are up 1.3 percent, reflecting a 5.3 percent increase in prices of less-processed items and a 0.3 percent decline in prices of more-processed items.

Faster Growth in Rent, Price of Dining Out, Continues in April

As we noted above, core services prices rose at a 2.6 percent annualized rate in April, after rising at a 2.9 percent rate in March. Prices for core goods rose at a 0.6 percent annualized rate after posting an effectively zero rate in March. On a 12-month basis, core goods prices are down 0.5 percent, while core services prices are up 2.1 percent. As we have noted a few times in the Inflation Update, from a longer-run perspective the decline in core goods prices is not unusual; rather, it is the rate of core services inflation that is unusually low.

As usual, core goods prices contained a mix of outsized increases and decreases in April. The price index for newspapers and periodicals, up 21 percent at an annualized rate, made the biggest positive impact on headline inflation, while the price index for toys, games and hobbies, down an annualized 23 percent, made the biggest negative contribution.

Among core services, the price indexes for the non-fee services of “other depository institutions and regulated investment companies” (up an annualized 10.5 percent) and for air transportation (up an annualized 24.9 percent) made the most significant positive contributions to headline inflation in April, combining to contribute about 0.2 annualized percentage points to April’s headline rate. These components are two of the most volatile within core services, and their movements are not particularly informative about the underlying trend in consumer price inflation.

More informative are price movements in items like rent, owners’ equivalent rent (OER) and the price index for dining out—items that combine low volatility with large expenditure weights. These “big three,” as we refer to them in the Inflation Update, have shown a modest acceleration over the past few months, with all three posting rates of increase in excess of annualized 3 percent in March. Two of the three—rent and dining out—posted better-than-3-percent rates in April. Rent increased at a 4.1 percent annualized rate, up from a 3.8 percent rate in March, while the price index for dining out (more formally, “other purchased meals”) increased at a 3.1 percent annualized rate, after posting a 3.5 percent rate in March. OER increased at a 2.4 percent annualized rate in April, after posting a 3.2 percent rate a month earlier.

Our big three index—which aggregates rent, OER and the price of dining out—increased at a 2.9 percent annualized rate in April, and is up 2.6 percent from April 2013.

—Jim Dolmas
June 2, 2014


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