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Behind the Numbers: PCE Inflation Update, February 2015

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.

After three consecutive monthly declines, the headline, or all-items, PCE price index rose at a 2.1 percent annualized rate in February. Prices for food, energy and core goods all swung to increases from declines in the prior month. Prices for core services also rose, though at a slightly slower pace than in January.

Gasoline prices snapped a string of seven straight monthly declines, rising by a seasonally adjusted 2.2 percent and contributing about half an annualized percentage point to February’s headline inflation rate.

The six-month headline inflation rate remains in negative territory at –1.1 percent, annualized, up from –1.5 percent in January. The 12-month headline inflation rate ticked up to 0.3 percent from 0.2 percent a month earlier.

The Dallas Fed’s trimmed mean inflation rate for February was an annualized 2 percent, similar to February’s headline rate. This follows two months of trimmed mean rates below annualized 1 percent—a 0.8 percent reading in December and a (revised) 0.2 percent rate in January. January’s trimmed mean rate had initially been reported as a 0.3 percent annualized decline.

The 12-month trimmed mean rate—which is also our rule-of-thumb forecast for average headline PCE inflation over the coming 12 months—ticked back up to 1.6 percent from 1.5 percent in January. Before January’s 1.5 percent, the trimmed mean had recorded six straight months at 1.6 percent.

Gasoline Prices Snap Streak of Declines

Prices for energy goods and services, taken as a whole, rose 1 percent in February (not annualized) as prices for gasoline (up 2.2 percent), fuel oil (up 1.9 percent) and electricity services (up 0.3 percent) all rose. The price index for natural gas services fell 2 percent.

For gasoline, February’s price increase comes after seven consecutive monthly declines, capped off by a nearly 19 percent drop in January. Over those seven months (beginning last July), gasoline prices fell over 36 percent and produced a considerable drag on headline PCE inflation. Six-month headline PCE inflation, currently an annualized –1.1 percent, would be 2 percentage points higher (at 0.9 percent) for an index excluding gasoline.

More timely data from the Department of Energy (DOE) show gasoline prices to have increased again in March. The DOE’s weekly retail price data have gasoline prices on track to increase by nearly 11 percent in March. The springtime months typically see large increases in the price of gasoline, as refiners gear up for summer driving season; hence, some of the price increase shown in the March DOE data is purely seasonal in nature. In particular, a typical March sees a roughly 6.4 percent increase in gasoline prices simply from seasonal effects. Adjusting the 11 percent increase in the DOE data to take this into account leaves a 4.4 percent seasonally adjusted price increase in March—much smaller than 11 percent but still double the size of the seasonally adjusted increase in February’s PCE data.

Given that gasoline contributed about 0.5 annualized percentage points to headline inflation in February, and March is on track for a price increase of twice the size of February’s, we can expect about a full percentage point contribution to headline inflation when PCE data for March are released.

Food Prices Rebound

After an unusual 2.9 percent annualized decline in January, food prices rebounded in February, with the PCE price index for food as a whole rising at a 1.3 percent annualized rate. Prices for less-processed food items fell—declining by an annualized 5.3 percent—but the decline was more than offset by a 4 percent annualized increase in the prices of more-processed food items. (More-processed items make up the bulk of food expenditures; hence, their 4 percent increase can outweigh a 5.3 percent decline in prices of less-processed items.)

Among less-processed items, fresh milk and fresh vegetables—both ranking among the most volatile items in the PCE basket—experienced outsized price declines. Milk was down an annualized 33 percent for the month, while fresh vegetables were down an annualized 21 percent. The two items combined to shave about 0.2 annualized percentage points off February’s headline inflation rate.

“Food products not elsewhere classified”—which includes snacks, frozen foods, canned goods and other miscellaneous products—had the largest headline impact among more-processed food items, rising in price at a 12 percent annualized rate and contributing about 0.1 annualized percentage points to February’s headline rate.

Over the past 12 months, prices for food as a whole are up 2.6 percent, reflecting a 4.5 percent increase in prices of less-processed items and a 1.8 percent increase in prices of more-processed items.

‘Big Three’ Services Post Healthy Price Gains

Following three fairly steep declines—averaging an annualized rate of –3.2 percent—prices for core goods rose at a 1.5 percent annualized rate in February. Prices for core services rose at an annualized rate of 1.7 percent, after posting an annualized 2 percent rate in January.

Leading the increase in core goods prices were men’s and boys’ clothing (up an annualized 30 percent) and prescription drugs (up an annualized 7.6 percent). The two components combined to contribute roughly 0.4 annualized percentage points to February’s headline inflation rate and more than accounted for the increase in our index of core goods prices. Core goods apart from those two components fell in price at a 0.6 percent annualized rate in February, roughly in line with core goods’ 12-month rate of decline.

On a 12-month basis—which averages out some of the month-to-month volatility in goods prices—core goods prices are down 0.7 percent. They had been down 0.9 percent for the 12 months through January.

Among core services, the always-volatile price index for the non-fee services of “other depository institutions and regulated investment companies” had the largest impact on headline inflation in February. Rising an annualized 14 percent, the index contributed roughly 0.15 annualized percentage points to February’s headline inflation rate.

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 3.2 percent annualized rate of increase, up from a 2.7 percent rate in January and a touch above the big three’s 12-month average rate of 3 percent. All three components in the index posted annualized rates of increase at or above 3 percent for the month.

Rent growth was a robust 4.2 percent, annualized—up from 3 percent in January—while OER and other purchased meals both came in at 3 percent—up from rates of 2.8 and 2.2 percent in January. For the 12 months through February, rent is up 3.6 percent, OER is up 2.7 percent and the price index for other purchased meals is up 3.2 percent.

The 12-month core services inflation rate held steady at 2.1 percent.

—Jim Dolmas
March 30, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update