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Behind the Numbers: PCE Inflation Update, March 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.

The headline, or all-items, PCE price index rose at a 2.1 percent annualized rate in March, identical to its rate of increase in February. Higher gasoline prices were a key contributor to March’s headline rate, more than offsetting noticeable declines in the prices of food, natural gas and electricity services.

The increase in gasoline prices—3.9 percent at a monthly rate—was the second in a row, coming on the heels of a 2.2 percent increase in February. Despite the back-to-back increases, gasoline prices remain down 28 percent from a year ago.

The 12-month headline inflation rate held steady at a low 0.3 percent, while the six-month headline rate ticked up from an annualized –1.1 percent to –0.9 percent.

The Dallas Fed’s trimmed mean inflation rate for March was an annualized 2 percent, similar to February’s trimmed mean rate of 2.2 percent. The 12-month trimmed mean rate—which is also our rule-of-thumb forecast for average headline PCE inflation over the coming 12 months—held steady at 1.6 percent. The 12-month trimmed mean rate has been between 1.5 and 1.7 percent for the past 12 months (and equal to 1.6 percent for nine of those months).

The six-month trimmed mean rate inched up from an annualized 1.3 percent to 1.4 percent.

Gasoline Up for a Second Consecutive Month

As noted, gasoline prices rose for a second straight month in March, though these two months of gains reverse only a small portion of the slide in prices between July and January (which amounted to about a 36 percent decline).

March’s 3.9 percent increase was nevertheless substantial and contributed roughly a full annualized percentage point to March’s headline inflation rate. The price of fuel oil also rose sharply, increasing 5.9 percent from a month earlier.

The other major energy items in the PCE basket—electricity and natural gas services—experienced declines. The price index for electricity services fell 1.1 percent, while the price index for natural gas services fell 2.7 percent. Natural gas prices have declined in nine of the past 12 months and are down 14.5 percent from March 2014. Electricity prices are close to unchanged over that period, up just 0.1 percent from March 2014.

Prices for energy goods and services as a whole rose 1.5 percent in March but are down 18.5 percent from a year earlier.

As usual, we can get a preview of the gasoline component of the next PCE release, for April, by looking at weekly price data from the Department of Energy (DOE). Those data show gasoline prices on track for a 0.4 percent increase in April, before seasonal adjustment. A 0.4 percent increase is unusually small for April—a typical April sees a 1.8 percent increase in gasoline prices. Taking account of that seasonal pattern, the DOE data have gasoline prices on track for a seasonally adjusted decline of 1.4 percent. Thus, after two months of positive contributions to headline PCE inflation, gasoline should swing back to being a drag—though a slight one—in April’s PCE release.

Food Prices Down in March

Food prices fell noticeably in March, declining at an annualized rate of 3.4 percent. The decline was broad-based—among broad food expenditure categories, only cereals and bakery products, fish and seafood, and alcoholic beverages recorded price increases.

The price declines with the biggest impact on headline inflation were for fresh fruits and pork. The price of each of these components fell about 25 percent on an annualized basis and subtracted about a tenth of an annualized percentage point off March’s headline inflation rate.

As we usually do in the inflation update, we also split food into its less-processed and more-processed components. Both groups experienced price declines in March—our price index for less-processed food items fell an annualized 9 percent, while our price index for more-processed items fell a more moderate 1.1 percent.

In spite of a couple large declines—in March and, before that, in January—food prices remain up on a 12-month basis. The PCE price index for food as a whole is up 1.8 percent from a year ago, while our less-processed and more-processed indexes are up 2.5 percent and 1.5 percent, respectively.

Stronger Growth in Core Services Prices; Core Goods Flat

Prices for core goods were essentially unchanged in March, rising at an annualized rate of just 0.1 percent, while prices for core services posted one of their strongest readings in recent months, rising at a 2.4 percent annualized rate. Recent rates of increase for core services have been below an annualized 2 percent since the series posted a 2.6 percent rate last November.

Among core goods, used autos (down an annualized 13.9 percent) and furniture (up an annualized 11 percent) recorded the biggest-impact price movements, subtracting and adding about 0.1 annualized percentage points to March’s headline inflation rate.

The 12-month rate of increase in our index of core goods prices ticked up to –0.5 percent from –0.6 percent.

Among core services, communication and nursing home services experienced outsized declines, with large impacts on March’s headline inflation rate. The PCE price index for communication services fell at a 3.4 percent annualized rate, while the index for nursing home services fell at a 5.6 percent rate. The two components combined to subtract about 0.2 annualized percentage points from the headline inflation rate.

At the other end of the spectrum, increases in the price indexes for financial service charges, fees and commissions (up an annualized 7 percent), pension fund services (31 percent) and physician services (4.3 percent) all had noticeable impacts on the headline rate, combining to contribute about 0.3 annualized percentage points.

Our “big three” core services index—which aggregates rent, owners’ equivalent rent (OER) and the price index for dining out—rose at a 2.8 percent annualized rate in March, down from a 3.2 percent rate in February. Dining out (formally “other purchased meals”) increased at a 1.6 percent annualized rate, well below recent readings (an average 3 percent over the past 12 months).

The behavior of the shelter components in March was more in line with their recent readings. OER increased at a 3.1 percent annualized rate, similar to its increase in February and above its 12-month rate of 2.7 percent. Rent increased at a 3.7 percent annualized rate in March, down from a 4.2 percent rate in February but close to its 12-month rate of 3.6 percent.

Our big three index’s 12-month rate ticked down to 2.9 percent from 3 percent in February. The 12-month rate for all core services held steady at 2 percent.

—Jim Dolmas
April 30, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update