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Behind the Numbers: PCE Inflation Update, November 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 close to unchanged in November, rising just 0.3 percent at an annualized rate (or just 0.03 percent at a monthly rate). Weighing on the headline rate were price declines for food and for energy goods and services—gasoline in particular. The PCE price index for food fell at a 2.8 percent annualized rate, while the index for energy goods and services fell at a 15.2 percent annualized rate. The conventional core PCE price index, which excludes food and energy items, rose at a 1.4 percent rate, combining a noticeable decline in the prices of core goods (down at a 2.3 percent annualized rate) with a solid increase in the prices of core services (up at a 2.7 percent annualized rate).

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.6 percent in November, close to the trimmed mean’s average 1.7 percent rate over both the past six and 12 months. The 12-month trimmed mean rate has been in a narrow range of 1.6 to 1.7 percent since April 2014.

The 12-month headline inflation rate ticked up to 0.4 percent from 0.2 percent in October, while the 12-month core rate held steady at 1.3 percent.

Historically, gaps between the 12-month headline and trimmed mean rates tend to be closed by the headline rate converging toward the trimmed mean rate. We thus continue to expect a substantial pickup in the headline inflation rate from its current low level.

Energy a Drag (Again) in November

As noted above, energy prices were a significant drag on November’s headline inflation rate. The PCE price index for gasoline and other motor fuel fell 2.5 percent for the month (not annualized), while the price index for natural gas services fell 1.9 percent. These two components combined to subtract about three quarters of an annualized percentage point off November’s headline inflation rate.

Among other energy components, the price index for fuel oil fell 1.3 percent, and the price index for electricity services rose 0.3 percent. Apart from electricity, which is down just 0.2 percent from November 2014, prices for energy goods and services remain sharply below year-ago levels.

More-timely data from the Department of Energy (DOE) point to an even larger drop in gasoline prices in December. Over the first three weeks of December, weekly retail price data from the DOE show gasoline prices on pace for a decline of roughly 7 percent from November. Some of that decline is seasonal in nature—a typical December sees a roughly 2 percent price decline due to seasonal supply and demand factors. Taking the seasonal pattern into account (and with the caveat that the data for the month are not yet complete), gasoline prices are on pace for a roughly 5 percent seasonally adjusted decline in December, or about twice the magnitude of November’s drop.

A Broad-Based Decline in Food Prices

Prices for food (taken as a whole) fell at a 2.8 percent annualized rate in November—breaking a string of five months of increases. Among broad categories, only fruits and vegetables (both fresh and processed) and fish and seafood recorded price increases.

The price declines were similar for both more-processed and less-processed food items. Our price index for more-processed food items fell at a 2.9 percent annualized rate, while our price index for less-processed items fell at a 2.5 percent annualized rate.

For the 12 months through November, prices for food as whole are up 0.3 percent, prices for more-processed food items are up 0.8 percent, and prices for less-processed items are down 0.9 percent.

A Sharp Drop for Core Goods Prices, Healthy Gain for Core Services

Core goods prices fell noticeably for a second straight month in November, declining at a 2.3 percent annualized rate after posting a 2.2 percent rate of decline in October. Women’s and girls’ clothing, jewelry and a catch-all category of decorative household items (clocks, lamps, lighting fixtures and the like) posted the most significant declines, in the sense of having the largest impact on November’s headline inflation rate. Each of the three components subtracted about 0.1 annualized percentage points off November’s headline rate. At the other end of the spectrum, a nearly 20 percent increase in the price index for motorcycles—not annualized—added about 0.2 annualized percentage points to the headline inflation rate.

Goods prices are always highly volatile, so one month of data is not particularly informative. For the 12 months through November, core goods prices are down 0.7 percent. For some context, since 1993, core goods prices have fallen at an average annualized rate of 0.3 percent.

Core services prices, which are much less volatile, rose at a healthy 2.7 percent annualized rate in November, well above their average pace of 2 percent over the past 12 months. Notable price increases—in terms of their impact on headline inflation—included the price indexes for financial service charges (up 18.3 percent at an annualized rate), the expenditures of nonprofits serving households (6.1 percent), communication services (5.3 percent), hotels and motels (15.4 percent), and pension funds (30.4 percent). Financial service charges contributed about 0.3 annualized percentage points to November’s headline inflation rate; the other components contributed about 0.1 percentage points each.

Our “big three” services index—consisting of rent, owners’ equivalent rent (OER) and the price index for dining out—posted a 2.4 percent annualized rate of increase, down from a 2.8 percent rate in October and below the index’s 12-month rate of 3.1 percent.

While all three components posted slower rates of increase in November compared with October, rent saw the sharpest deceleration, increasing at a 2.7 percent annualized rate, down from a 3.5 percent rate in October. That 2.7 percent rate of increase in November represents the smallest one-month gain for rent since December 2014. For the 12 months through November, rent is up 3.6 percent.

OER increased at a 2.5 percent annualized rate in November, similar to October’s 2.7 percent, but below the component’s 12-month rate of 3.1 percent. The price index for dining out—formally, other purchased meals—rose at a 2 percent annualized rate, down from 2.3 percent a month before. The index is up 2.6 percent on a 12-month basis.

—Jim Dolmas
December 23, 2015

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update