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Behind the Numbers: PCE Inflation Update, September 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 fell at a 1 percent annualized rate in September, pulled down by a sharp 8.9 percent decline in the price index for gasoline and other motor fuel. Prices for food rose at a slightly faster pace in September compared with August, while prices for core goods broke a series of four monthly declines with a 1.8 percent annualized gain. The rate of increase in the prices of core services in September, an annualized 1.8 percent, was similar to August’s rate.

Not surprisingly, given the 1.8 percent rates recorded by core goods and services, the conventional core PCE price index—PCE excluding food and energy—also rose at a 1.8 percent annualized rate in September. This follows a 1.1 percent annualized rate in August.

The Dallas Fed’s trimmed mean PCE inflation rate registered a roughly similar pace in September, an annualized 1.7 percent. September’s reading follows annualized rates of 1.5 percent in August and 1.4 percent in July.

The 12-month headline rate ticked down to 0.2 percent from 0.3 percent in August, while the 12-month ex food and energy rate held steady at 1.3 percent. The 12-month trimmed mean rate, at 1.7 percent, was also unchanged from August. The 12-month trimmed mean rate has now been either 1.6 or 1.7 percent for 18 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 0.2 percent.

Gasoline a Drag Once More; Reversal Likely in October

The PCE price index for energy goods and services fell 4.9 percent in September, with all four of its major components registering declines: gasoline and other motor fuel, as noted above, fell 8.9 percent; fuel oil, 2.4 percent; electricity services, 0.5 percent; and natural gas services, 0.3 percent.

The decline in the price index for gasoline alone subtracted about 2.5 annualized percentage points off September’s headline inflation rate (in the sense that an index of all items except gasoline would have risen by an annualized 1.5 percent, rather than declining by an annualized 1 percent, as the all-items index did).

Anyone who has taken note of gasoline prices in October might think gasoline was apt to make another negative contribution to headline inflation when October’s PCE data are released. While it’s true that prices at the pump have fallen further in October, it turns out that all of that decline can be chalked up to seasonal factors. In fact, compared with the normal price declines we would expect to see in October, gasoline prices have not fallen enough—they are actually up from September on a seasonally-adjusted basis.

Our data for October comes from the weekly retail price surveys taken by the Department of Energy (DOE). Those data—which are not seasonally adjusted, and are as yet not complete for the month—show gasoline prices on pace for a 3 percent decline compared with September. The typical seasonal pattern (which one can find in data from the Bureau of Labor Statistics, used in constructing the Consumer Price Index) calls for a 4.3 percent decline in October. Thus, assuming the pattern in the DOE data holds up as the final week’s data come in, we would expect a seasonally adjusted 1.3 percent increase in the price of gasoline in October.

Since it’s the seasonally adjusted price change that goes into the PCE, October’s PCE data should show a small positive contribution from gasoline (about 0.4 annualized percentage points).

On a 12-month basis, prices for energy goods and services as a whole were down 19.6 percent in September, reflecting 12-month declines of various sizes in gasoline (29.6 percent), fuel oil (34.9 percent), electricity services (0.4 percent) and natural gas (12.1 percent).

Food Prices Up on Increases for More-Processed Items

The PCE price index for food as a whole (formally, “food and beverages purchased for off-premises consumption”) rose at a 2.2 percent annualized rate in September, compared with a 1.9 percent rate in August.

In contrast to August, September featured a fairly robust increase in the prices of more-processed food items, which rose at a 2.6 percent annualized rate (following a 0.7 percent annualized decline a month earlier). Prices for less-processed food items rose at a more modest 1 percent annualized rate, down from the 8.3 percent annualized rate they recorded in August.

Among less-processed items, fresh produce, milk, beef and veal, and pork all registered price increases, more than offsetting declines in the prices of other less-processed components. The price of eggs, which had risen 35 percent over the prior four months, declined 0.6 percent.

Prices for more-processed items were up, with just a couple exceptions (cereals and alcoholic beverages). The PCE price index for “food products not elsewhere classified”—a catch-all consisting of snacks, soups, frozen meals, condiments, and so forth—posted a 9.5 percent annualized gain and had, among all food items, the largest impact on September’s headline inflation rate, contributing about 0.1 annualized percentage points.

For the 12 months from September 2014, food prices are up 0.7 percent, reflecting a 1.1 percent increase in the prices of more-processed items and a 0.2 percent decrease in the prices of less-processed items.

Core Goods, Big Three Services Post Hefty Gains

As noted above, core goods prices snapped a string of four consecutive monthly declines in September, rising at a 1.8 percent annualized rate for the month. This increase was fairly broad-based. Among the major components of core goods, only apparel, pharmaceuticals and tobacco registered notable declines. Durable goods prices were up an annualized 2.8 percent, which is a very robust increase for a category that tends to average a roughly 2 percent rate of decline.

In spite of September’s increase, core goods prices remain down 0.6 percent for the 12 months from September 2014.

Prices for core services also rose at a 1.8 percent annualized rate in September, but in this case the performance is very much in line with prior months (a 1.7 percent rate in August and 2 percent for the 12 months from September 2014).

Among broad service categories, the price indexes for recreation services, financial services and the consumption expenditures of nonprofits recorded declines. Health care and transportation posted modest gains. Those declines and modest gains tempered the impact of robust increases in our “big three” service components—rent, owners’ equivalent rent (OER) and the price of dining out.

Rent rose at a 4.9 percent annualized rate in September, a postrecession high. OER, meanwhile, rose at a 3.7 percent annualized rate, a pace topped only by June’s 4.4 percent, over a period stretching back to 2007. The price index for dining out (formally, “other purchased meals”) rose at a similar rate to OER, recording a 3.8 percent annualized increase in September.

Not surprisingly, the one-month change in our “big three index,” an aggregate of the three components, matched its postrecession high, an annualized 3.9 percent rate recorded in June.

The 12-month rates of increase for rent and OER each ticked up a tenth of percentage point in September—rent to 3.7 percent and OER to 3.1 percent—while the 12-month rate for other purchased meals held steady at 2.8 percent. The big three index’s 12-month rate was also unchanged at 3.1 percent.

—Jim Dolmas
October 30, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update