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Behind the Numbers: PCE Inflation Update, April 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 was essentially unchanged in April, rising just 0.3 percent at an annualized rate after posting rates at or near 2 percent in February and March. Gasoline prices, which fell a seasonally adjusted 1.7 percent for the month, were a significant drag on the headline rate. Food prices also fell for a second consecutive month. Prices for core services rose at a slightly slower pace in April than in March, while prices for core goods were close to unchanged for a second straight month.

The 12-month headline inflation rate ticked down to 0.1 percent from 0.3 percent in March, and the six-month headline rate held steady at –1 percent.

Despite the swings in the headline rate, the Dallas Fed’s trimmed mean inflation rate indicates that the underlying trend in PCE inflation remains steady. The trimmed mean rate for April was an annualized 1.9, similar to March’s 1.8 percent and February’s 2 percent. Both of those earlier numbers are revised slightly from last month’s release—March’s trimmed mean rate was initially reported as an annualized 2 percent, and February’s was reported last month as an annualized 2.2 percent.

The six-month trimmed mean rate ticked up to an annualized 1.5 percent from 1.4 percent in March. Meanwhile, the 12-month trimmed mean rate remains constant, coming in at 1.6 percent for a 10th straight month. That 12-month rate also remains our rule-of-thumb forecast for average headline PCE inflation over the coming 12 months; we’re thus expecting a noticeable pickup from the low values currently being plumbed by the headline rate.

Gasoline a Drag in April, Poised to Provide Boost in May

Gasoline prices were down in April by about the amount we expected at the time of last month’s update—we were looking for a drop of 1.4 percent, which is close to the actual drop of 1.7 percent. April’s decline follows two months of price increases, which followed seven straight monthly declines. Gasoline prices subtracted about half an annualized percentage point off April’s headline inflation rate.

Other energy components were down in price—or at most unchanged—in April. Fuel oil prices were down 8.4 percent from March, while the price index for natural gas services declined 2.6 percent. The price index for electricity services was effectively unchanged (and we might even want to drop the “effectively”—the actual change was a 0.0009 percent increase).

Not surprisingly, the PCE price index for energy goods and services as a whole was down, falling 1.4 percent from March. On a 12-month basis, the overall energy index is down 20 percent.

May’s PCE release, though, should show some reversal of April’s energy price declines as gasoline prices rose at their fastest pace in several years. Weekly retail price data from the Department of Energy show gasoline prices on track for a roughly 9.7 percent increase in May. And very little of that is due to seasonal factors—in recent years, a typical May sees just a 0.2 percent increase in gasoline prices. When PCE data for May are released, we should expect to see a roughly 9.5 percent seasonally adjusted increase in the index for gasoline and other motor fuel. If this transpires, it would be the largest monthly increase since June 2009.

With gasoline’s weight in the PCE basket at roughly 2 percent of expenditure, a price increase of that size would contribute about 0.2 monthly percentage points to the headline inflation rate, or more than 2 annualized percentage points. Barring some extraordinary developments, we should thus expect May’s headline inflation rate to be well in excess of an annualized 2 percent.

Food Price Declines Continue

Food prices fell in April for a second straight month (and a third month out of the past four). The PCE price index for food as a whole declined an annualized 2 percent. As was the case in March, the retreat was broad based, with major categories such as meat and poultry, cereals and bakery products, dairy products and fresh produce all recording declines.

Slicing the data somewhat differently, though—into less-processed and more-processed food items—we find that price declines were more pronounced among less-processed items. Our index of prices of less-processed items fell an annualized 6.7 percent in April, while our index of more-processed items was close to unchanged (down less than an annualized 0.1 percent).

Food prices remain up on a 12-month basis, though their rate of increase has slowed. The PCE price index for food as a whole is up 1.3 percent from April 2014; last month’s 12-month rate—comparing March 2015 to March 2014—was 1.8 percent. The 12-month rate for our index of less-processed food items was 0.8 in April, down from 2.5 percent in March. The 12-month rate for more-processed items held steady at 1.5 percent.

Core Goods Unchanged; Core Services Cool Slightly

Prices for core goods were essentially unchanged again in April, rising at an annualized rate of just 0.2 percent on the heels of an annualized 0.0 percent reading in March. Those rates are actually a bit stronger than normal for core goods—over the past 12 months, core goods prices are down 0.5 percent, which is also around their longer-term average rate of change.

Among core goods, men’s and boys’ clothing had the biggest impact on headline inflation—declining by an annualized 17.7 percent, the component subtracted over a tenth of an annualized percentage point from April’s headline rate.

Meanwhile, prices for core services rose at a 1.7 percent annualized rate in April, compared with a 2.2 percent rate in March and a 1.8 percent rate over the past 12 months. The always-volatile price index for the nonfee services of “other depository institutions and regulated investment companies” was the most noticeable drag on our index of core services prices, falling at a 13.8 percent annualized rate and subtracting over 0.3 annualized percentage points from April’s core services rate (and about 0.2 percentage points from April’s headline rate).

While overall core services inflation cooled somewhat in April, our “big three” index of core services prices accelerated. The big three are rent, owners’ equivalent rent (OER) and the price index for dining out (“other purchased meals”); they combine very large weights in consumer expenditures with very low volatility, and may be informative about the underlying trend in core services inflation.

The big three index recorded a 3.2 percent annualized rate of increase in April, up from a 2.8 percent rate in March. Of the three components, OER and other purchased meals both posted faster rates of growth in April than in March—for OER, an annualized 3.4 percent in April versus 3.1 percent in March, and for other purchased meals, 2.9 percent in April versus 1.6 percent in March. Rent growth slowed somewhat to a 3.1 percent annualized rate in April from a 3.7 percent rate in March.

The 12-month rate of increase in our big three index ticked up to 3 percent from 2.9 percent in March.

—Jim Dolmas
June 1, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update