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Behind the Numbers: PCE Inflation Update, February 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 fell at a 1.3 percent annualized rate in February, pulled down by a sharp decline in gasoline prices. The PCE price index for gasoline and other motor fuel fell nearly 13 percent from January and alone subtracted about 3 annualized percentage points off February’s headline inflation rate.

Prices for food, core goods and core services were all up for the month. Food prices rose at a 2.3 percent annualized rate, after falling in each of the prior three months. Core goods prices rose at a 2.3 percent annualized rate in February, following a 1.8 percent annualized rate of increase in January. Core services prices rose at a moderate 1.6 percent annualized rate, down from a 3.8 percent rate in January. The conventional core PCE price index—PCE excluding food and energy—rose at a 1.8 percent annualized rate, after recording a 3.3 percent rate a month earlier.

The Dallas Fed’s trimmed mean PCE inflation rate was also an annualized 1.8 percent in February, following a 2.3 percent annualized rate in January. The 12-month trimmed mean rate ticked down to 1.8 percent from 1.9 percent in January, though the difference is smaller than meets the eye—rounded to two decimal places, February’s 12-month rate was 1.84 percent, compared with 1.86 percent in January.

The 12-month headline rate also inched down in February, to 1 percent from 1.2 percent a month earlier. The 12-month core rate was unchanged at 1.7 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 expect a further pickup in the headline inflation rate over the coming year.

Energy Prices Down Sharply in February

Prices for energy goods and services, taken as a whole, fell 6.4 percent in February, with gasoline registering the sharpest decline. The PCE price index for gasoline and other motor fuel fell 12.9 percent in February. This is the second biggest decline in the gasoline price index since 2009, topped only by an 18.6 percent drop in January 2015. Gasoline prices are down 17.8 percent on a 12-month basis.

Among other major energy components, prices for fuel oil and electricity were also down in February, with fuel oil falling 2.9 percent and electricity falling a modest 0.2 percent. The price index for natural gas services rose 1 percent for the month. Natural gas prices remain down 9.4 percent from February 2015. Over the same period, electricity prices are down 3.6 percent and fuel oil prices are down 32.1 percent.

The PCE price index for energy goods and services is down 12.3 percent from February 2015.

Weekly retail price data from the Department of Energy (DOE) show gasoline prices increasing in March, but by an amount not much in excess of a normal seasonal increase. The DOE data—which as yet cover only the first three weeks of March—have gasoline prices on pace for an 8.6 percent increase, while a typical March sees a 7.9 percent increase based on seasonal variation in supply and demand factors.

Thus, if the pattern in the weekly data holds up, we should expect a small 0.7 percent seasonally adjusted increase in gasoline prices when PCE data for March come out. The contribution of such a small increase to March headline inflation would be negligible.

Food Prices Rebound

After three monthly declines (by an average annualized rate of 2.7 percent), prices for food and beverages, taken as a whole, rose in February by an annualized 2.3 percent.

Underlying February’s increase was a 3 percent annualized increase in our price index for more-processed food items. Notable increases among more-processed items included cereals (up at 15.2 percent annualized rate) and soft drinks (up at a 9.3 percent rate).

Prices of less-processed food items, as a whole, were also up in February, but by a very small 0.6 percent, annualized.
Since February 2015, overall food prices remain down, by 0.1 percent. Over the same period, prices for less-processed items are down 1.4 percent, while prices for more-processed items are up 0.4 percent.

Core Goods Up Again; Core Services Slow

Core goods prices rose sharply for a second straight month, increasing an annualized 2.3 percent in February. Large price increases for prescription drugs (up an annualized 11.8 percent), women’s and girls’ clothing (annualized 24 percent) and jewelry (annualized 46.3 percent) helped boost our price index for core goods, and together contributed about an annualized percentage point to February’s headline inflation rate.

For the 12 months through February, core goods prices are down 0.2 percent, as they were for the 12 months through January. Their 12-month rate of change had been as low as –0.8 as recently as October 2015.

After posting a robust 3.8 percent annualized rate of increase in January, prices for core services increased at a more moderate 1.6 percent rate in February. Price declines in the volatile transportation and financial services categories weighed on the core services rate, as did a slower rate of increase in the price index for “other purchased meals.”

The price index for other purchased meals—informally, the price of dining out—increased at a 1.8 percent annualized rate in February, down from a 4.5 percent rate in January, and below the index’s 12-month rate of 2.5 percent.

Other purchased meals, together with rent and owners’ equivalent rent (OER), make up what we refer to in the Inflation Update as the “big three” core services—a title owing to these components’ combination of large expenditure shares with very low volatility. In contrast to other purchased meals, both rent and OER increased in February at rates similar to January. Rent increased at a 3.8 percent annualized rate in February, compared with a 3.5 percent rate a month earlier, while OER increased at a 3.1 percent annualized rate in February, compared with a 3 percent rate in January.

Our big three index, which aggregates the three components, increased at a 2.9 percent annualized rate, down from a 3.4 percent rate a month earlier, and slightly below the index’s 12-month rate of 3.1 percent.

Prices for core services as a whole are up 2.3 percent on a 12-month basis.

—Jim Dolmas
March 28, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update