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Behind the Numbers: PCE Inflation Update, May 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 increased at a 2 percent annualized rate in May, after increasing at a 3.7 percent annualized rate in April. Higher prices for energy goods and services in May were roughly offset by a decline in food prices. As a result, the core PCE price index—PCE excluding food and energy—also rose at a 2 percent annualized rate for the month. Prices for core goods fell at a 1.6 percent annualized rate, while prices for core services posted a robust 3.2 percent rate of increase.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.9 percent in May, down from a 2.4 percent annualized rate in April, and in line with the trimmed mean’s 12-month average rate of 1.8 percent.

Revisions by the Bureau of Economic Analysis to the underlying data for the first quarter of the year produced slight ticks down in the 12-month trimmed mean rates for January and February. Previously reported as 1.9 percent, the 12-month trimmed mean rates for those months are now 1.8 percent. As a result, the 12-month trimmed mean rate has now been steady at 1.8 percent for five months.

The 12-month headline inflation rate ticked down to 0.9 percent in May from 1.1 percent in April, and the 12-month core inflation rate held steady at 1.6 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 12 months.

Gasoline Prices Up in May; Similar Gain Expected for June

The price index for gasoline and other motor fuel rose 2.3 percent in May, following an 8 percent increase in April. The gasoline index contributed about 0.5 annualized percentage points to May’s headline inflation rate, in the sense that an index of all items other than gasoline would have increased at a 1.5 percent annualized rate, rather than the 2 percent rate recorded by the all-items price index.

Among other energy goods and services, prices were up in May for fuel oil (6.2 percent) and natural gas services (1.7 percent), while prices for electricity services fell slightly (–0.2 percent). Prices for energy goods and services taken as a whole were up 1.4 percent for the month.

Prices for energy goods and services remain down 10.9 percent from a year earlier, with gasoline down 17.5 percent.

Weekly retail price data from the Department of Energy (DOE) point to another moderate increase in gasoline prices in June. The DOE data show gasoline prices on track for a roughly 4 percent increase in June, but about 1 percentage point of that increase reflects seasonal supply and demand factors. The weekly retail price data thus lead us to expect a 3 percent seasonally-adjusted increase when PCE data for June are released, not too different from May’s increase of 2.3 percent.

If this prediction is borne out, we would expect gasoline to again add about 0.5 annualized percentage points to the headline inflation rate, similar to its contribution in this month’s data.

Food Prices Down Broadly

Prices for food and beverages, taken as a whole, were down in May by an annualized 5.4 percent. The price declines were broad-based, with 18 of the 22 disaggregated food components in the PCE recording price declines. The exceptions were the price indexes for poultry (up an annualized 2.6 percent); coffee, tea and other beverage materials (annualized 7.8 percent); beer (annualized 1.4 percent); and food produced and consumed on farms (unchanged).

Not surprisingly, given the breadth of the price declines, our price indexes for less-processed and more-processed food items were both down in May. The index for less-processed items declined at a 5.2 percent annualized rate, while the index for more-processed items declined at a 5.4 percent annualized rate.

For the 12 months through May, prices for food and beverages as a whole are down 0.3 percent, reflecting a 1.8 percent drop in the prices of less-processed items and a 0.3 percent increase in the prices of more-processed items.

Core Goods Prices Decline; Rent Growth Ticks Up

After being effectively flat in April, prices for core goods fell an annualized 1.6 percent in May. Outsized price declines for computer software and accessories, prescription drugs and motorcycles had noticeable negative impacts on headline inflation, combining to subtract about 0.6 annualized percentage points off May’s headline rate. At the other end of the spectrum, outsized price increases for jewelry and apparel combined to add about 0.5 annualized percentage points to May’s headline rate.

Our price index for core goods is down 0.5 percent on a 12-month basis, a touch below April’s 0.4 percent year-on-year decline.

Core services prices, meanwhile, were up 3.2 percent at an annualized rate in May. Financial service charges, fees and commissions, paramedical services and legal services all posted outsized increases. Together, they contributed about 0.6 annualized percentage points to May’s headline inflation rate. A sharp decline in the price index for airline transportation services—always among the more volatile components of core services—subtracted about 0.2 annualized percentage points.

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 3.9 percent annualized rate in May, following a 3.6 percent rate of increase in April. Individually, rent rose at a 4.4 percent annualized rate, OER rose at a 4.3 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 2.7 percent annualized rate. For OER, May’s increase is its biggest one-month gain since a 4.4 percent annualized increase in June of last year.

For the 12 months through May, the big three index is up 3.2 percent. Over the same period, rent is up 3.9 percent, and OER is up 3.3 percent. The 12-month increases for each are 0.1 percentage points higher than in April. The price index for other purchased meals is up 2.6 percent on a 12-month basis, unchanged from April.

Prices of core services as a whole rose 2.3 percent for the 12 months ending in May, identical to their 12-month increase through April.

—Jim Dolmas
June 29, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update