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Behind the Numbers: PCE Inflation Update, January 2016

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 1.2 percent annualized rate in January, after falling at a 0.8 percent annualized rate in December. As was the case in December, price declines for energy goods and services (down at a nearly 30 percent annualized rate) and for food (down at a 1.8 percent annualized rate) were noticeable drags on headline inflation. In contrast with December, though, January saw robust increases in prices for core goods and services. Prices for core goods rose at a 1.8 percent annualized rate, after falling by a similar amount the month before. Prices for core services rose at a 3.6 percent annualized rate, compared with a 1.9 percent rate in December. The conventional core PCE price index rose at a 3.2 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 2.2 percent in January, compared with a modest 1 percent rate in December. The 12-month trimmed mean rate—which had remained in a narrow band of 1.6 to 1.7 percent for nearly two years—increased to 1.9 percent.

The 12-month headline and core rates also increased, with the 12-month headline rate rising to 1.3 percent from 0.7 percent in December, and the 12-month core rate rising to 1.7 percent from 1.5 percent in December.

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 expect a further pickup in the headline inflation rate over the coming year. In the very near term, though, there is reason to believe that declining energy prices will slow that convergence. Data on gasoline prices for February point to a drop in the PCE price index for gasoline and other motor fuel more than twice the size of January’s drop, which alone shaved about 1.2 annualized percentage points off the headline inflation rate.

Energy Price Drag Continues

Prices for energy goods and services were down across the board in January. Prices for gasoline and fuel oil—energy goods—fell 4.8 percent and 6.5 percent, respectively. Price declines in energy services were more moderate, with electricity falling 0.7 percent and natural gas falling 0.6 percent.

For the 12 months ending in January, the PCE price index for gasoline and motor fuel fell just 3.5 percent, compared with a 17.5 percent decrease for the 12 months ending in December. The narrowing in the 12-month decline has less to do with recent movements in the price of gasoline and more to do with movements a year ago. Last January saw a nearly 19 percent fall in the price index for gasoline, which means a very big drop in the base from which we calculate the 12-month change.

Among other energy components, fuel oil is down 28.7 percent from a year ago, electricity is down 3.1 percent, and natural gas is down 12.1 percent. The PCE price index for energy goods and services taken as a whole is down 5.2 percent.

As noted above, data so far for February point to a much large decline in gasoline prices than the 4.8 percent drop in January. Weekly data from the Department of Energy (DOE) show retail gasoline prices on track for a 9.2 percent decline for the month. Those data make no adjustment for seasonal patterns in gasoline prices. When we take into account that a typical February sees a 3.6 percent increase in gasoline prices, the DOE data have gasoline prices on track for a 12.8 percent seasonally adjusted decline in February. A plunge of that magnitude, if realized, would subtract roughly 3 annualized percentage points off February’s headline inflation rate.

Food Prices Down for Third Straight Month

Prices for food, taken as a whole, fell at a 1.8 percent annualized rate in January, marking a third consecutive monthly decline. As was the case in December, prices for less-processed food items dropped more sharply than prices for more-processed food items. Our index of prices of less-processed items was down an annualized 4.7 percent for the month, while our index of prices for more-processed items was close to unchanged, falling just an annualized 0.6 percent.

Among all food items, eggs had the most noticeable impact on January’s headline inflation rate; egg prices fell 8.4 percent (not annualized) and subtracted about a tenth of an annualized percentage point off the headline inflation rate. Egg prices have fallen roughly 19 percent over the last five months but remain about 7 percent above their level of May 2015, just prior to last year’s massive price increases.

For the 12 months through January, prices for food as a whole are down 0.2 percent, with a 1.9 percent decline in prices for less-processed items more than offsetting a 0.5 percent increase in prices of more-processed items.

Core Goods and Services Both Post Robust Gains

Core goods prices snapped a string of three consecutive months of decline with an annualized 1.8 percent increase in January. The increase was broad based, with only a few major categories recording declines. Prices for apparel, jewelry, new motor vehicles and pharmaceuticals were all up noticeably.

On a 12-month basis, core goods prices are down just 0.1 percent, up from a 0.4 percent 12-month decline through December.

Prices for core services, meanwhile, recorded a robust 3.6 percent annualized increase, which is among the fastest rates of increase this category has posted over the past several years. Among broad categories, prices for transportation services (up 6.7 percent at an annualized rate), food services and accommodations (5.5 percent), financial services and insurance (5.7 percent) and recreation services (3.7 percent) all increased at healthy rates.

Our price index for the core services we refer to as the “big three”—rent, owners’ equivalent rent (OER) and other purchased meals—increased at a 3.4 percent annualized rate, its fastest rate of increase since last September. Other purchased meals (essentially, the price index for dining out) led the big three, posting a 4.4 percent annualized rate of increase, well above the component’s 12-month rate of 2.6 percent and its fastest one-month rate of increase since November 2014.

Rent and OER recorded increases more in line with their recent behavior. Rent increased at a 3.5 percent annualized rate in January, while OER increased at a 3 percent annualized rate. Neither monthly number is far from its component’s respective 12-month rate (3.8 percent for rent and 3.2 percent for OER).

The 12-month rate of increase in our big three index ticked up from 3.1 percent to 3.2 percent, its highest level in over seven years.

—Jim Dolmas
February 26, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update