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Behind the Numbers: PCE Inflation Update, March 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 0.6 percent annualized rate in March (or just 0.05 percent at a monthly rate). This was identical to the rate of increase in the conventional core PCE price index—PCE excluding food and energy—as falling food prices largely offset rising prices for energy goods and services. Among core items, core goods prices fell sharply (at a 2.9 percent annualized rate) after two months of equally sharp increases. Prices for core services rose at a moderate 1.8 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.6 percent in March. While March looks like a weak inflation month through the lens of the excluding food and energy index, this is less evident in the trimmed mean, as March’s trimmed mean rate is not that far off the trimmed mean’s recent average pace.

The 12-month trimmed mean rate held steady at 1.8 percent, while 12-month headline and core rates both inched down. The 12-month headline rate declined to 0.8 percent from 1 percent in February, and the 12-month core rate ticked down to 1.6 percent from 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, continue to expect a noticeable pickup in the headline inflation rate over the coming year.

Energy Prices Up in March; Bigger Increase Expected in April Data

Prices for energy goods and services, taken as a whole, rose 1.1 percent in March (not annualized), breaking a string of three monthly declines.

Gasoline prices registered the largest increase (2.2 percent), followed by fuel oil (1.7 percent) and electricity services (0.4 percent). The price index for natural gas services fell 0.7 percent.

Prices for all the major energy components remain down sharply from year-ago levels. In aggregate, prices for energy goods and services are down 12.7 percent from March 2015.

Looking ahead to the next PCE release, weekly retail price data from the Department of Energy indicate that gasoline prices rose roughly 7 percent in April. Part of that increase—0.9 percentage points—is seasonal in nature: a typical April in recent years sees a 0.9 percent increase in gasoline prices due to seasonal variation in supply and demand conditions. Thus, based on the weekly data, we expect to see a 6.1 percent seasonally adjusted increase in gasoline prices when PCE data for April are released.

Given gasoline’s share of expenditure (now about 1.8 percent), a price increase of that magnitude would be expected to contribute about 0.1 monthly percentage points (or about 1.3 annualized percentage points) to April’s headline PCE inflation rate.

Food Prices Down in March

Prices for food and beverages, taken as a whole, fell at a 5.3 percent annualized rate in March. Most broad categories were down—the only exceptions being fish and seafood, sugar and sweets, and the catch-all “food products not elsewhere classified.”

Price declines were sharper among less-processed food items, which is not surprising given the much greater volatility for this subset of food items. Our price index for less-processed food items fell at a 13.4 percent annualized rate in March, while our index for more-processed items was down an annualized 1.9 percent.

Since March 2015, overall food prices are down 0.2 percent. Over the same period, prices for less-processed items are down 1.8 percent, while prices for more-processed items are up 0.4 percent.

Core Goods Prices Fall, Core Services Up Moderately

After two months of sharp increases—an average annualized 2.8 percent—prices for core goods fell an annualized 2.9 percent in March. Price declines for men’s and boys’ clothing (down an annualized 23.7 percent) and jewelry (an annualized 31.1 percent) were the most significant declines in terms of their impact on March’s overall inflation rate. The two components combined to subtract about half an annualized percentage point off headline inflation in March.

The 12-month change in core goods prices declined to –0.4 percent in March from –0.1 percent in February.

Prices for core services rose at a 1.8 percent annualized rate in March, similar to February’s 1.7 percent rate. The price indexes for hotels and motels—one of the more volatile core services components—and admissions to spectator sports registered notable declines, combining to subtract about 0.3 annualized percentage points off March’s headline inflation rate. At the other end of the spectrum, the price indexes for the nonfee services of depository institutions and “financial service charges, fees and commissions” recorded outsized increases and together contributed about 0.2 annualized percentage points to headline inflation in March.

Our “big three” price index—aggregating the three largest and least volatile components of core services: rent, owners’ equivalent rent (OER) and the price of dining out—rose at a 2.8 percent annualized rate in March. Individually, rent rose at a 3.5 percent annualized rate, OER at a 2.6 percent annualized rate and dining out (more formally, “other purchased meals”) at a 2.9 percent annualized rate.

For the 12 months through March, the big three index is up 3.1 percent, identical to February. Over the same period, our price index for core services as a whole is up 2.2 percent, down from 2.4 percent for the 12 months through February.

—Jim Dolmas
May 2, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update