Behind the Numbers: PCE Inflation Update, January 2015
The headline, or all-items, PCE price index fell at a 5.3 percent annualized rate in January, as gasoline prices recorded their biggest one-month drop since December 2008. The PCE price index for gasoline and other motor fuel fell 18.6 percent in January, and subtracted roughly 5.5 annualized percentage points off the headline PCE inflation rate.
Price growth apart from gasoline was generally weak as well. January saw roughly 45 percent of the PCE basket experience price declines (weighting components by their shares of expenditure), which matches the all-time high in our data. Food prices fell at a 2.9 percent annualized rate, while prices for core goods fell at a 1.9 percent annualized rate. Prices for core services rose at a 1.6 percent annualized rate.
The Dallas Fed’s trimmed mean inflation rate, which is calculated by excluding all the most extreme price movements, confirms the weak pace of consumer price inflation in January. The trimmed mean rate was an annualized –0.3 percent for the month. This follows a modest 0.8 percent rate in December, and brings the trimmed mean’s average rate over the past six months down to an annualized 1 percent.
The 12-month trimmed mean rate, which had been steady at 1.6 percent for six straight months, ticked down to 1.5 percent in January. The 12-month headline rate fell to 0.2 percent from 0.8 percent in December. We continue to expect that, over time, headline inflation will converge toward trimmed mean inflation. In particular, our rule-of-thumb forecast now expects headline PCE inflation over the coming year to average 1.5 percent, the current 12-month trimmed mean rate.
Gasoline Down Again, But String Poised to Snap
January’s decline in the price of gasoline—a nearly 19 percent seasonally adjusted drop—caps seven straight months of falling gasoline prices. Over that span, the PCE price index for gasoline and other motor fuel has fallen more than 36 percent, and this large decline has had a significant impact on average headline inflation over that time. The current six-month headline inflation rate is –1.5 percent, annualized. An index of all items except gasoline would have posted a six-month rate of annualized 0.8 percent, so gasoline alone has shaved roughly 2.3 annualized percentage points off the six-month headline rate.
Such a large impact at the six-month horizon is rare—components with very volatile price movements tend to experience a mix of ups and downs, so their contributions averaged out over more than a few months tend to be small. Apart from components like rent, owners’ equivalent rent or the price index for dining out (which generate big impacts largely from their big expenditure shares), the contributions of nearly all PCE components at a six-month horizon are smaller than plus or minus 0.1 annualized percentage points. This has been a truly remarkable string of declines in price for gasoline.
That string, though, may finally be coming to an end. Weekly retail price data from the Department of Energy show gasoline prices on track to have increased by about 4.2 percent in February. Some of that increase is seasonal in nature—in recent years, a typical February sees a 2.8 percent rise in gasoline prices. Subtracting that seasonal component leaves a seasonally adjusted price increase of 1.4 percent.
Against a 36 percent drop, that 1.4 percent increase is small indeed, but does reduce significantly the drag on monthly headline inflation rates. Given gasoline’s share of expenditure—now about 2 percent—a 1.4 percent price increase means that gasoline should contribute roughly 0.3 annualized percentage points to February’s headline inflation rate.
Energy developments outside of gasoline were mixed in January, with prices for fuel oil (–9.9 percent) and natural gas services (–3.4 percent) down, and the price index for electricity services (0.9 percent) up. Prices for energy goods and services taken as a whole were down 10.4 percent in January and are down 21.2 percent since January 2014.
Food Prices Drop
As noted above, prices for food—more precisely, the prices for food and beverages purchased for off-premises consumption—fell at a 2.9 percent annualized rate in January, their first decline since January 2014. Price increases were confined to the broad categories of meat and poultry, sugar and sweets, and cereals and bakery products; all other major components experienced price declines, the largest being a 16.9 percent annualized drop in the price index for milk, dairy products and eggs.
Price declines also cut across our categorization of food into less-processed and more-processed items; our index of prices of less-processed items fell at a 7.3 percent annualized rate, while our index of prices of more-processed items fell at a 1.1 percent annualized rate.
In spite of the month’s broad-based decline, for the 12 months through January, prices for food as a whole are still up 2.7 percent, with prices for less-processed items up 6.1 percent and prices for more-processed items up 1.4 percent.
Core Goods Prices Down, Core Services Accelerate Slightly
Prices for core goods fell noticeably in January, declining 1.9 percent at an annualized rate. The sharp decline was nevertheless smaller than the declines we saw in November (an annualized 4.5 percent drop) or December (a 2.9 percent drop). The decline was broad-based, with only household supplies and personal care products (among broad categories of goods) registering price increases. Motor vehicles and parts (down at a 5.8 percent annualized rate), pharmaceutical products (down at a 3 percent rate), and nondurable recreational items (down at a 7.4 percent rate) all recorded notable declines.
For the 12 months through January, core goods prices are down 0.8 percent, a slight deceleration from the 0.6 percent decline posted for the 12 months through December.
Core services prices, meanwhile, increased at a 1.6 percent annualized rate, up from a 1.2 percent rate in December, but below their 12-month pace of 2.1 percent. Declines in the price indexes for health care (down at a 4.4 percent annualized rate) and transportation (down at a 1.8 percent annualized rate) contributed to the moderate growth in core services prices. Tax preparation services (up 46 percent at an annualized rate) recorded the largest price increase among the components of core services.
Our “big three” core services index—consisting of rent, owners’ equivalent rent (OER) and the price index for dining out (“other purchased meals”)—posted a 2.7 percent annualized rate of increase, up from a 2.4 percent rate in December, but below the big three’s 12-month average rate of 2.9 percent. In contrast to December, the price index for other purchased meals was the main source of drag, increasing at a 2.2 percent annualized rate, down from a 3.3 percent rate in December and below the series’ 12-month rate of 3.2 percent.
Rent growth picked up somewhat to a 3 percent annualized rate in January after posting a 2.4 percent annualized rate in December. January’s increase is still below rent’s 12-month pace of 3.4 percent. OER also accelerated, increasing at a 2.8 percent annualized rate, following a 2 percent rate in December and compared with a 12-month average of 2.6 percent.
On a 12-month basis, core services inflation was close to unchanged from December, though January’s rate (2.05 percent at two decimal places) would round up to 2.1 percent, while December’s (2.02 at two decimal places) would round down to 2 percent.
—Jim Dolmas
March 2, 2015