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Behind the Numbers: PCE Inflation Update, December 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 1.1 percent annualized rate in December. As was the case in November, falling prices for energy goods and services (down at a 27 percent annualized rate) and for food (down at a 4.5 percent annualized rate) were noticeable drags on headline inflation. The conventional core PCE price index, which aggregates items apart from food and energy, was close to unchanged, rising at just a 0.5 percent annualized rate in December. Prices for core goods recorded another substantial decline, falling at an annualized rate of 2.5 percent, while prices for core services rose at a moderate 1.6 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 0.9 percent in December, below the trimmed mean’s 12-month rate of 1.7 percent. The 12-month trimmed mean rate has been in a narrow range of 1.6 to 1.7 percent since April 2014. The six-month trimmed mean rate dipped to 1.5 percent in December from 1.7 percent in November.

The 12-month headline rate ticked up to 0.6 percent from 0.4 percent in November, while the 12-month core rate held steady at 1.4 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. That convergence is unlikely to begin in January’s data, though, as recent movements in gasoline prices point to another month of very low or negative headline inflation.

Gasoline Continues to Drag Down Headline Rate

Prices for energy goods and services were down uniformly in December, led by a 4 percent decline in the price index for gasoline and other motor fuel. The decline in the price of gasoline by itself subtracted roughly an annualized percentage point off December’s headline inflation rate. The gasoline and motor fuel price index fell 19.9 percent over 2015, nearly matching its 20.7 percent decline over 2014.

Among other energy components, the price index for fuel oil fell 7.8 percent, while the price indexes for electricity and natural gas services fell 0.4 percent and 2.3 percent respectively. For the 12 months of 2015, fuel oil is down 31.4 percent, electricity is down 1.2 percent, and natural gas is down 14.9 percent.

More-timely data from the Department of Energy (DOE) point to yet another large drop in gasoline prices in January. Those data, which are not seasonally adjusted, show the average retail price of gasoline on track for a decline of 4.1 percent in January. Since gasoline prices typically rise in January, the implied seasonally-adjusted decline is even larger. In recent years a typical January has seen a roughly 1.7 percent increase in the price of gasoline owing to seasonal patterns in supply and demand. Taking account of that pattern, the DOE data have January gasoline prices on pace for a 5.8 percent seasonally-adjusted decline.

A price decline for gasoline of that size, if it is borne out in next month’s PCE release, would subtract about 1.4 annualized percentage points off January’s headline inflation rate.

Food Prices Down for Second Straight Month

Food prices fell for a second consecutive month, with the PCE price index for food and beverages purchased for off-premises consumption falling at a 4.5 percent annualized rate in December. The decline in the overall index reflected declines in prices of both less-processed and more-processed food items. In contrast to November—when prices for less-processed and more-processed items fell by similar amounts—prices for less-processed items fell more sharply in December.

Our index of prices of less-processed items fell at a 10.7 percent annualized rate, led by a 25 percent annualized rate of decline in the price index for beef and veal. Our index of prices of more-processed items fell at a 1.9 percent annualized rate. In November, both indexes fell at annualized rates between 2.5 and 2.9 percent.

On a 12-month basis, prices for food as a whole are down 0.3 percent, with prices for less-processed items down 2.2 percent, and prices for more-processed items up 0.5 percent.

Some Slowing in Big Three Core Services

Core goods prices declined noticeably for a third straight month, falling at a 2.5 percent annualized rate in December, after posting declines of annualized 1.9 percent and 2.1 percent in the prior two months. Among core goods, price declines for televisions (down at a 38.6 percent annualized rate), games, toys and hobbies (down at a 21 percent annualized rate) and women’s and girls’ clothing (down at a 7.5 percent annualized rate) had the largest impact on December’s headline inflation rate. These three components combined to subtract about 0.3 annualized percentage points off the headline inflation rate.

Over the past 12 months, cores goods prices have fallen by 0.6 percent, which is not far from their longer-run average rate of decline. Over the past six months, though, core goods prices have averaged an annualized 1.2 percent rate of decline.

Prices for core services, meanwhile, rose at a moderate 1.6 percent annualized rate in December, down from a robust 3.3 percent rate in November, and below core services’ 12-month rate of 2.1 percent. Among broad categories of core services, “food services and accommodations” (consisting mainly restaurant and hotel services) and “professional and other services” (consisting of items such as legal services, accounting services and tax preparation) experienced the most noticeable decelerations in December. The price index for food services and accommodations was essentially unchanged in December, after increasing at a 3.3 percent annualized rate in November, while the price index for professional and other services fell at a 2.4 percent annualized rate, after rising at a 1.7 percent rate in November.

Most of the slowing in the food services and accommodations category owes to a sharp 7.9 percent annualized decline in the volatile hotels and motels component, but contributing as well was a slower rate of increase in the price index for “other purchased meals”. This component, which posted a 1.2 percent annualized rate of increase in December, down from a 2 percent rate in November, is one our “big three” core services—the three core services that best combine low volatility and large expenditure shares.

The other two components of the big three—rent and owners’ equivalent rent (OER)—recorded slightly faster rates of increase in December compared with November. Rent increased at a 2.9 percent annualized rate, up from a 2.7 percent rate in November, while OER increased at a 2.8 percent rate in December, up from a 2.5 percent rate a month earlier.

In general, though, each of the big three services has been increasing at a slower pace over the past three months—October, November and December—than over the prior six months or so. Our big three index, which aggregates the three components, increased at a roughly 2.6 percent annualized rate for the three months since September, compared with a 3.4 percent annualized rate for the six months ending in September. Nonetheless, the index’s 12-month rate remains steady at 3.1 percent.

The 12-month rate of increase for all core services was 2.1 percent in December, unchanged from November.

—Jim Dolmas
February 1, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update