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Behind the Numbers: PCE Inflation Update, May 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 3.8 percent annualized rate in May, boosted by a sharp increase in gasoline prices (which alone contributed about 2.6 annualized percentage points to May’s headline rate). May’s robust headline rate comes on the heels of a negligible 0.5 percent annualized rate in April.

Food prices, down a cumulative 0.6 percent for the year through April, were close to unchanged in May. Core goods prices fell at a 0.9 percent annualized rate in May after posting three months of increases, while prices for core services rose at a healthy 2.5 percent annualized rate.

The six-month headline rate increased to an annualized 0 percent in May from a –0.9 percent rate in April, while the 12-month headline rate held steady at a low 0.2 percent.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 2.3 percent in May, identical to a (revised) 2.3 percent rate posted in April. With a revision to March’s rate—to an even 2 percent from a previously reported 1.8 percent—the trimmed mean has now posted four consecutive months of annualized rates at or above 2 percent.

In spite of this run of monthly rates, the 12-month trimmed mean rate held steady at 1.6 percent for an 11th straight month. This stability in the face of what appears to be a noticeable pickup over the past few months owes mainly to the very low trimmed mean rates recorded in December and January. In fact, if the monthly trimmed mean rate for June matches the average of the trimmed mean rate of the past four months—and assuming no revisions to the April and May numbers—we’ll see a 12th straight 1.6 percent value for the 12-month rate in next month’s release.

The six-month trimmed mean rate—which obviously puts more weight on the past few months of data—ticked up to an annualized 1.7 percent in May from 1.6 in April (and has picked up by 0.5 percentage points since January).

Energy Prices Up, with Another Increase in the Pipeline

As noted above, rising gasoline prices accounted for a hefty portion of May’s 3.8 percent headline inflation rate. The PCE price index for gasoline and other motor fuel rose a seasonally adjusted 10.2 percent for the month, close to the 9.5 percent increase we anticipated in last month’s update. With May’s increase, the gasoline and motor fuel price index is up 15 percent from January, but nevertheless remains a whopping 26.6 percent below its level of July 2014.

Based on more timely data from the Department of Energy (DOE), we should expect another healthy gain in the gasoline price index when PCE data for June are released. The DOE’s weekly retail price data show gasoline prices on track for a roughly 3 percent increase in June, before seasonal adjustment. Given that a typical June sees a 0.8 percent decline in gasoline prices, the 3 percent increase in the DOE data corresponds to a 3.8 percent seasonally adjusted gain.

Assuming that gain is actually realized—the DOE data for June are still incomplete—gasoline would end up contributing about an annualized percentage point to next month’s headline inflation rate.

The prices of other energy goods and services in May were mixed, with fuel oil up 0.7 percent, electricity services down 1.2 percent and natural gas unchanged. The PCE price index for energy goods and services as a whole increased 4.7 percent for the month, and remains down 16.8 percent from a year earlier.

Food Prices Decline, But Just Barely

After two months of noticeable declines, prices for food (taken as a whole) fell again in May, though negligibly. With a –0.5 percent annualized change from April (or –0.0 at a monthly rate), the PCE price index for food and beverages purchased for off-premises consumption was close to unchanged.

As usual, more extreme price movements were recorded by less-processed food items, which were down an annualized 3.1 percent for the month. Also typical, the food items with the biggest impact on May’s headline inflation rate were in the less-processed category—poultry prices, down an annualized 16.1 percent, subtracted 0.1 annualized percentage points from May’s headline rate, while fresh vegetables, up an annualized 15.1 percent, contributed a scant 0.03 annualized percentage points.

The decline in poultry prices is apt to be reversed in coming PCE releases as the effects of the avian flu hitting Midwestern poultry production make their way to prices at the grocery store. Egg prices have also risen noticeably since May, by about 40 percent from the week of May 22–28 to the week of June 19–25, according to advertised retail price data collected by the U.S. Department of Agriculture (see http://search.ams.usda.gov/MNDMS/2015/06/PY20150619WRETAILEGG.pdf).

Prices for more-processed food items were close to unchanged in May, posting a scant 0.6 percent annualized rate of increase. This follows a negligible 0.1 percent annualized decline in April.

For the 12 months since May 2014, prices for food as a whole are up 0.7 percent, reflecting a 0.8 percent decline in the prices of less-processed items and a 1.3 percent increase in the prices of more-processed items.

Core Services Growth Matches Recent Highs

After three straight increases—albeit very small ones in two of those months—prices for core goods fell in May, declining by an annualized 0.9 percent. Among core goods, newspapers and periodicals (up an annualized 22.1 percent) and women’s and girls’ clothing (down by annualized 8.9 percent) made the biggest positive and negative impacts on headline inflation in May. The former added roughly 0.1 annualized percentage points to May’s headline rate, while the latter subtracted about 0.2 annualized percentage points.

For the 12 months from May 2014, core goods prices are down 0.5 percent, identical to their average rate of decline over the past 20 years.

Core services, meanwhile, rose at a 2.5 percent annualized rate in May. This is just the third time in the last 12 months that the rate of increase in core services prices has been at or above 2.5 percent, which is their 20-year average rate of increase. For those 12 months, our index of core services prices is up 1.9 percent.

Core services prices tend, as a whole, to be more stable than core goods prices, but there are nonetheless a number of components of core services that typically display high volatility. When we calculate which items had the biggest impact on any given month’s headline inflation rate, we almost invariably find a couple of those “usual suspects” (though the signs of their contributions—positive or negative—may vary from month to month). May was no exception, as the highly volatile nonfee services of “other depository institutions and regulated investment companies” (up at a 15.1 percent annualized rate) and hotel and motel services (down an annualized 26.7 percent) made the largest positive and negative headline contributions among core services. The former added just over 0.1 annualized percentage points to May’s headline rate, while the latter subtracted about 0.3 annualized percentage points.

Our “big three” core services index—consisting of rent, owners’ equivalent rent (OER) and the price of dining out—recorded a second monthly increase in excess of an annualized 3 percent (3.1 percent, to be exact, following a 3.2 percent rate in April). Rent growth accelerated noticeably to an annualized 3.8 percent in May, compared with an annualized 3.1 percent in April. OER recorded a 3 percent annualized rate of increase, down from a 3.4 percent rate in April, while dining out (the price index for “other purchased meals”) rose at a 2.7 percent rate in May, compared with a 2.9 percent rate in April.

The big three index is up 3 percent on a 12-month basis, reflecting increases of 3.5 percent for rent, 2.8 percent for OER and 3 percent for other purchased meals.

—Jim Dolmas
June 25, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update