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Behind the Numbers: PCE Inflation Update, June 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 2.8 percent annualized rate in June, lifted in part by another robust increase in the price of gasoline. This follows a 3.8 percent annualized headline rate in May. The six-month headline rate rose to an annualized 1 percent in June from 0.1 percent in May, while the 12-month headline rate ticked up to 0.3 percent from 0.2 percent.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 2.1 percent in June, marking a fifth straight month of annualized rates of 2 percent or better. The six-month trimmed mean rate rose to an annualized 1.9 percent from 1.7 percent a month earlier, and the 12-month trimmed mean rate ticked up to 1.7 percent from 1.6 percent. The uptick breaks a string of several consecutive 1.6 percent readings for the 12-month trimmed mean rate.

Our rule-of-thumb forecast for headline PCE inflation over the next 12 months is, as always, just the current 12-month trimmed mean rate. We thus expect a noticeable acceleration in the 12-month headline rate over the coming year.

Annual Revision Has Small Impact on Trimmed Mean

As usual, the PCE data for June incorporate the results of the BEA’s annual revision to the National Income and Product Accounts. For the trimmed mean (as well as the headline index), the revision affects data going back to January of 2012.

The impact of the revision on previous trimmed mean inflation rates was generally small and positive. Rounding to two decimal places, 12-month trimmed mean rates from January 2012 to December 2014 are now calculated to be anywhere from 0.00 to 0.16 percentage points higher than previously reported. The biggest impact occurs in January 2014—originally calculated at 1.42 percent; the 12-month rate for that month is now calculated to have been 1.58 percent.

The revision also changes slightly the picture of stability in the trimmed mean over the past year. Prior to the revision, the 12-month trimmed mean rate had been 1.6 percent in April 2014, 1.7 percent in May and June of 2014, and 1.6 percent from July 2014 onward. In the revised data the 12-month trimmed mean rate is 1.7 from April to September of 2014, and 1.6 percent from October 2014 to May 2015.

The revised headline rates are also generally higher, by small amounts, compared with their previously released values. For the 12-month headline rate, the biggest difference between the pre- and post-revision values is in October 2013—previously calculated at 0.86 percent; the 12-month headline rate for October 2013 is now calculated to be 1.04 percent.

BEA’s revision affects the trimmed mean because it changes the underlying component data—prices and expenditures—that go into calculating the trimmed mean. Almost all of the underlying prices and expenditures were affected to some extent, though in most cases the changes had negligible impact. One component, though, had an outsized impact, and in fact accounts for the bulk of the revision to the trimmed mean; that component is the price index for financial service charges, fees, and commissions, which is now estimated to have risen at a considerably faster pace than previously thought.

In the pre-revision data, between January 2012 and March 2014, the financial service charges price index rose at an average annualized rate of 2.7 percent. In the post-revision data, that average rate of increase rises to 7.8 percent. Given the component’s weight in expenditure of around 2 percent, that large revision in its rate of increase produces a noticeable effect on overall PCE inflation and, as it turns out, trimmed mean PCE inflation.

Energy Prices Up in June

Gasoline prices rose 3.3 percent in June, a hefty increase, though considerably less than the 10.2 percent we saw in May. Gasoline alone contributed roughly 0.9 annualized percentage points to June’s headline inflation rate.

When PCE data for July are released later this month, we will see a slight reversal of those increases, based on weekly retail price data from the Department of Energy. Those data show gasoline prices declining by about 0.2 percent in July, before taking into account the seasonal pattern in gasoline prices. That seasonal pattern normally features a larger price decline in August, roughly 1.1 percent. A 0.2 percent decline when the seasonal pattern calls for a 1.1 percent drop implies a seasonally adjusted decline of 0.9 percent.

That’s a relatively small decline for gasoline—most of its price swings are much larger—and the impact on July’s headline inflation rate should be correspondingly small. Given gasoline’s share of expenditure, a 0.9 percent price decline would be expected to shave just 0.02 monthly percentage points off the headline inflation rate, or about 0.2 annualized percentage points.

Other energy components were mixed in June, with the price of fuel oil down 1.9 percent, natural gas services up 0.3 percent and electricity services up 0.2 percent. The PCE price index for energy goods and services as a whole was up 1.8 percent for the month, compared with a 4.7 percent increase in May and a 15.9 percent decline since June 2014.

The ‘Egg-pocalypse’ Arrives

The massive spike in egg prices that we noted last month in U.S. Department of Agriculture data finally made its way into PCE data in June—and almost single-handedly produced a robust 3.5 percent annualized increase in the price index for food as a whole.

In the PCE data the price index for eggs rose 18.3 percent in June. That figure is not annualized; the annualized rate of increase would be in excess of 600 percent. How much of June’s robust growth in the price index for food as a whole owes to the spike in egg prices? If we exclude eggs from the basket, PCE food prices were up just an annualized 0.9 percent in June.

Reflecting the sharp increase in egg prices, our index of less-processed food items was up by an annualized 9.2 percent in June. Our index of more-processed food items was up at a much more moderate 1.3 percent annualized rate.
Even with June’s fairly rapid growth in the overall food price index, the index is still up just 1 percent on a 12-month basis. Underlying that increase are 12-month rates for less-processed and more-processed food items of 0.2 percent and 1.3 percent respectively.

Big Three Services Clock Fastest Growth in Years

Core goods prices were down in June by an annualized 1.5 percent—their largest decline since last December’s 3.2 percent annualized drop. Prices for about 40 percent of core goods items (weighted by their shares of expenditure) declined in June. The most significant price decline, in terms of its impact on headline inflation, was an annualized 7.8 percent drop in the price of men’s and boys’ clothes, which subtracted about 0.1 annualized percentage points off June’s headline rate.

Core services, meanwhile, rose at a 2.9 percent annualized rate, in spite of notable drops in the price indexes for hotel and motel services (down 21.6 percent at an annualized rate), physicians’ services (down 0.8 percent, annualized) and paramedical services (also down 0.8 percent), which combined to subtract nearly 0.5 annualized percentage points off June’s headline inflation rate.

More than offsetting those declines were strong increases in rent, which rose at a 4.5 percent annualized rate, and owners’ equivalent rent (OER), which rose at a 4.4 percent annualized rate. For rent, June’s increase was the fastest since October 2012; for OER, it was the fastest since October 2006, which was also the last time we observed OER increase at an annualized rate better than 4 percent.

Rent and OER are two of the three components that go into our “big three” core services index, the third being the price index for other purchased meals (essentially, dining out). The price index for other purchased meals rose at a tamer rate than those posted by its two partners—just 2 percent at an annualized rate. Nevertheless, our big three price index recorded an increase of 3.9 percent at an annualized rate in June, its biggest one-month gain in over seven years.

On a 12-month basis, the big three index is up 3.1 percent, reflecting a 3.5 percent increase over that period in rent, a 2.9 percent increase in OER and a 3 percent increase in the price index for other purchased meals.

—Jim Dolmas
August 7, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update