Behind the Numbers: PCE Inflation Update, October 2015
The headline, or all-items, PCE price index rose at a 0.8 percent annualized rate in October, after two consecutive monthly declines. Energy prices—the main driver behind the recent declines—reversed course in October, increasing at a moderate 2.4 percent annualized rate. Prices for food rose at a similar pace. Prices for items apart from food and energy—the conventional core PCE price index—rose at a modest 0.6 percent annualized rate, dragged down by a sharp 2.2 percent annualized decline in the prices of core goods. Prices for core services rose at a moderate 1.5 percent annualized rate, slightly below their pace of recent months.
The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.3 percent in October, slightly below the trimmed mean’s average pace over the prior three months (about 1.6 percent).
The 12-month rates of increase for the headline, conventional core and trimmed mean all held steady in October, with the headline at 0.2 percent, the core at 1.3 percent and the trimmed mean at 1.7 percent.
Historically, gaps between the 12-month headline and trimmed mean rates tend to be closed by the headline rate converging toward the trimmed mean rate. This is the basis for our rule-of-thumb forecast for future headline PCE inflation: a good guess for the headline rate over the coming 12 months is the trimmed mean rate over the prior 12 months. We thus continue to expect a substantial pickup in the headline inflation rate from its current low 0.2 percent.
Energy Prices Record Moderate Increase
Energy prices rose in October, reflecting increases in the prices of gasoline and electricity services, partially offset by declines in the prices of fuel oil and natural gas services.
Gasoline prices rose 0.4 percent in October (on a seasonally adjusted basis), following sharp declines of 4.1 percent and 8.9 percent in August and September. The price index for electricity services also rose 0.4 percent for the month, while the price indexes for fuel oil and natural gas services fell 1.1 percent and 0.7 percent respectively.
The price index for energy goods and services, taken as a whole, rose 0.2 percent from September to October, but remains down 18.4 percent from October 2014. Prices for gasoline, the largest energy component, are down 27.9 percent from a year ago.
Looking ahead to the next PCE release, covering November, weekly data from the Department of Energy (DOE) point to another decline in gasoline prices. The DOE data, which do not yet give a complete picture of the month, show gasoline prices on track for a 4.3 percent decline, before taking account of seasonal patterns. Those seasonal patterns would lead us to expect a 1.8 percent decline in a typical November. The DOE data thus point to a seasonally adjusted price decline of 2.5 percent (the difference between the unadjusted 4.3 percent and the seasonal 1.8 percent).
Given gasoline’s share of expenditure (about 2 percent), a 2.5 percent price decline, should it happen, would shave about 0.05 monthly percentage points off November’s headline inflation rate, or about 0.6 annualized percentage points. Consequently, if all PCE components other than gasoline were to repeat their October performances in November, the November headline inflation rate would end up close to zero.
More-Processed Items Lead Food Price Gains
Prices for food, taken as a whole, rose moderately in October, recording a 2.3 percent annualized increase. This in line with the rate of increase in food prices over the past several months; from July to September food prices rose at an annualized rate of 2.2 percent.
Similar to September, October’s increase was accounted for mainly by the prices of more-processed food items. Our price index for more-processed items increased at an annualized 3.1 percent rate in October, following a 2.6 percent rate in September. A main driver behind this increase was a sharp 12 percent annualized increase in the price index for alcoholic beverages.
In contrast, our price index for less-processed food items increased at an annualized rate of just 0.4 percent, which follows a 0.9 percent increase in September. The price of eggs was the biggest mover among less-processed items, declining at a roughly 45 percent annualized rate in October. As steep as that decline is, it makes only a small dent in the cumulative 34.9 price increase we saw over May, June, July and August. Egg prices remain 27.7 percent higher than they were in April.
On a 12-month basis, prices for food as a whole are up 0.8 percent, reflecting a 1.3 percent increase in the prices of more-processed items and a 0.3 percent decline in the prices of less-processed items.
Core Goods Down Sharply, Services Post Moderate Gains
After increasing at a 1.9 percent annualized rate in September, core goods prices fell at a 2.2 percent annualized rate in October. Durable goods prices fell at a 2.5 percent annualized rate, which is not especially out of line with either their recent or longer-run behavior—over the past 12 months, durable goods prices are down 2 percent, while over the past 120 months they’ve fallen at a 1.7 percent annualized rate.
The prices of core nondurable goods fell at a 2 percent annualized rate in October, compared with a 0.2 percent increase for the 12 months ending in October. On a longer-run basis, over the past 10 years, the prices of core nondurables have risen at an average annualized rate of 1.4 percent. Declines in prices of apparel—both women’s and men’s—had the biggest impact on headline inflation among core goods; they combined to subtract roughly a quarter of an annualized percentage point off October’s headline inflation rate.
Core services prices, meanwhile, rose at a 1.5 percent annualized rate in October, a slightly softer rate of increase than we had seen for this category over either the past six or 12 months (both an annualized 2 percent pace). Financial service charges—typically volatile—had the biggest impact among core services. Falling at an 18 percent annualized rate, the component subtracted roughly half an annualized percentage point off October’s headline inflation rate.
Also contributing to the more moderate rate of increase in core services prices was deceleration in the prices of the “big three” core services—rent, owners’ equivalent rent (OER) and the price index for other purchased meals. Our big three index, which aggregates the three components, rose at a 2.8 percent annualized rate in October, down from a 3.9 percent rate in September, and compared with six- and 12-month rates of 3.3 and 3.1 percent.
All three components recorded slower rates of increase in October compared with September. Rent increased at a 3.5 percent annualized rate in October, versus a 4.9 percent rate in September. OER rose at a 2.7 percent rate, down from a 3.7 percent rate a month earlier. And other purchased meals—the price index for dining out—stepped down to a 2.3 percent rate in October from a 3.8 percent rate in September.
The 12-month rates for all three held steady in October, rent at 3.7 percent, OER at 3.1 percent and other purchased meals at 2.8 percent. Naturally, the 12-month rate of increase in our big three index also was unchanged, at 3.1 percent.
—Jim Dolmas
November 25, 2015