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Behind the Numbers: PCE Inflation Update, August 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 unchanged in August, after rising at a 1 percent annualized rate in July. Sharp declines in the prices of gasoline and fuel oil contributed significantly to August’s low headline reading. Energy goods and services as a whole were down 2.3 percent at a monthly rate after rising a slight 0.1 percent in July. Food prices increased at a slower pace in August, compared with July, while prices for core services rose at a slightly faster pace. Prices for core goods fell, though by a bit less than in either June or July.

The conventional core PCE price index—PCE excluding food and energy—rose at a 1.3 percent annualized rate, compared with a 0.9 percent rate in July, and exactly in line with the index’s 12-month rate of increase.

The Dallas Fed’s trimmed mean PCE inflation rate was annualized 1.7 percent in August, up from July’s 1.4 percent, but below the rates that the trimmed mean recorded from February to June (an average annualized rate of 2.2 percent).

The 12-month headline rate held steady at 0.3 percent for a fourth straight month, while the 12-month ex food and energy rate ticked up to 1.3 percent from 1.2 percent in July. The 12-month trimmed mean rate also ticked up, to 1.7 percent from 1.6 percent a month earlier. The 12-month trimmed mean rate has now been either 1.6 or 1.7 percent for 17 months, going back to April 2014.

As usual, our rule-of-thumb forecast for headline PCE inflation over the coming 12 months is just the current 12-month trimmed mean rate, or 1.7 percent. We thus continue to expect a substantial pickup from the headline index’s current 12-month rate of 0.3 percent.

Drag From Gasoline Likely to Continue

As noted above, falling prices for gasoline and fuel oil were among the most significant drags on August’s headline rate. Together, the two components subtracted about 1.4 annualized percentage points off the headline inflation rate (most of that attributable to gasoline). Gasoline prices were down 4.1 percent from July, while fuel oil prices were down 8.1 percent.

Those sharp declines more than offset moderate increases in the prices of electricity services (up 0.3 percent) and natural gas services (1.2 percent).

On a 12-month basis, all four of the main energy components in the PCE index remain down to varying degrees, from a –0.6 percent 12-month change for electricity to a –34.6 percent change for fuel oil. Gasoline—the dominant component among the four, given its volatility and share of expenditure—is down 23.4 percent from a year ago.

The drag from energy goods is apt to continue—and in fact strengthen—in September’s PCE release, based on more timely gasoline price data from the Department of Energy (DOE). Those data, which consist of nationwide weekly average retail gasoline prices, show gasoline on track for a roughly 10.5 percent decline in price in September compared with August.

The DOE data are not seasonally adjusted, but the usual August seasonal effect is just a 1.2 percent decline in price. Taking that seasonal pattern into account, September gasoline is still on track for a roughly 9.3 percent seasonally adjusted decline. August’s 4.1 percent decline subtracted about 1.25 annualized percentage points off the headline PCE inflation rate, so we would expect a drag of about twice that size, on the order or 2.5 annualized percentage points, in September’s PCE data.

The DOE data for September are not yet complete, so the ultimate decline—and drag on the headline rate—may differ somewhat. Based on the data so far, though, a negative headline inflation rate for September appears quite likely.

Food Price Gains Slow Despite Jumps in Eggs, Produce

Prices for food and beverages, taken as a whole, rose at a 1.8 percent annualized rate in August, compared with a 2.6 percent rate in July.

While July’s increase was driven mainly by the prices of more-processed food items (which rose at an annualized rate of 2.9 percent, compared with a 1.8 percent rate of increase for less-processed items), the opposite was true in August. Prices for more-processed food items actually fell at a 0.7 percent annualized, while prices for less-processed items rose at a sharp 8.3 percent annualized rate.

Driving the increase in our price index for less-processed items were a large price increase for fresh vegetables (1.7 percent at a monthly rate) and another steep increase in the price of eggs (7.7 percent at a monthly rate). Over the past four months, egg prices have risen nearly 35 percent.

In spite of some recent noticeable increases, prices for food as whole are up just 0.7 percent from a year ago, reflecting a 0.1 percent increase in prices of less-processed items and a 1.0 percent increase in prices of more-processed items.

Slower Decline in Core Goods, Faster Increase in Core Services

Prices for core goods declined in August at a 1.1 percent annualized rate, compared with a 1.6 percent annualized decline in July. Among core goods, jewelry (down an annualized 23 percent) and furniture (down an annualized 14 percent) made the most significant negative contributions to headline inflation, combining to subtract about 0.3 annualized percentage points from August’s headline rate. At the other end of the spectrum, prescription drug prices (up an annualized 5 percent) added just under 0.2 annualized percentage points to the headline rate.

The 12-month rate for core goods prices ticked up to –0.8 percent in August from –0.9 percent in July. As we have noted a number of times in the Inflation Update, this rate of decline for core goods prices is not unusual—over the past 20 years, core goods prices have fallen, on average, at a rate of 0.5 percent per year.

Prices for core services, meanwhile, rose at a 2.2 percent annualized rate in August, up from a 1.8 percent rate in July. Among core services components, only the price index for the final consumption expenditures of nonprofit institutions serving households, which increased at an annualized rate of 8.4 percent, combined both an outsized price change and a significant impact on headline inflation. The component contributed roughly 0.2 annualized percentage points to August’s headline inflation rate.

To be sure, other core services components made significant contributions, but those owe more to the various components’ large expenditure shares than to any extreme price movements. In particular, our “big three” core services components—rent, owners’ equivalent rent (OER) and the price index for “other purchased meals” (essentially, dining out)—made significant contributions, as they regularly do. The three components combine to account for roughly 19 percent of PCE.

The August readings on OER and other purchased meals were somewhat below those components’ recent rates of increase. Both rose at an annualized rate of 2.6 percent for the month, compared with 12-month rates of 3.0 percent for OER and 2.8 percent for other purchased meals. Rent increased at a 3.8 percent annualized rate in August, down from a 4.1 percent rate in July, but a hair above the component’s 12-month rate of 3.6 percent.

Our big three index—which aggregates the three components—rose at a 2.8 percent annualized rate in August, down from a 3.4 percent rate in July. The index’s 12-month rate held steady at 3.1 percent.

The 12-month rate for core services as a whole also held steady, at 2.0 percent.

—Jim Dolmas
September 28, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update