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Behind the Numbers: PCE Inflation Update, June 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 1.2 percent annualized rate in June. Similar to May, higher prices for energy goods and services were partially offset by a decline in food prices; on net, prices for food and energy together were up an annualized 4.5 percent for the month. The core PCE price index—PCE excluding food and energy—rose at a 0.8 percent annualized rate, weighed down by a sharp decline in core goods prices and slower growth in the prices of core services.

The Dallas Fed’s trimmed mean PCE inflation rate split the difference between the headline and core rates—exactly—coming in at an annualized rate of 1.0 percent for June.

As usual for the June PCE release, the data incorporate the results of the BEA’s annual revision to the National Income and Product Accounts. Data—including the underlying price and quantity data used to calculate the trimmed mean—were revised from 2013 forward. On average over the whole revision period, the impacts on headline, core and trimmed mean inflation were modest. Where headline inflation had averaged an annualized 0.99 percent from January 2013 to May 2016, the revised data show an average rate of 1.02 percent. For the core index, an average rate of 1.52 percent over the same period becomes an average rate of 1.56. The impact of the revised data on the trimmed mean was a slight reduction in its average rate over the revision period, from an annualized 1.70 percent to 1.65 percent.

Downward revisions to the growth in prices of some health care services appear to account for the bulk of the impact on the trimmed mean.

The small average impacts over the revision period mask some bigger changes over shorter time intervals. In terms of its 12-month inflation rate, the largest change to the ex food and energy measure was a 0.13 percentage point upward revision for December 2014. For the trimmed mean, the largest change, in absolute size, was a 0.12 percentage point downward revision for January 2016.

As a result of the revisions, 12-month trimmed mean inflation rates are now fairly steady at 1.7 percent in 2016. Previously, those 12-month inflation rates had been steady around 1.8 percent. The 12-month headline and core rates are 0.9 percent and 1.6 percent, respectively, for June; both are little changed from May (in either the prerevision or postrevision data).

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 June; Reversal Expected for July

The PCE price index for energy goods and services rose 1.5 percent in June, its fourth straight monthly increase. The index is up 8 percent over that period, but remains down 10 percent from June 2015 and 24.6 percent from June 2014.

Gasoline prices, as usual, were the dominant factor in June’s energy price increase. The PCE price index for gasoline and other motor fuel rose 3.3 percent from May and contributed about three quarters of an annualized percentage point to June’s headline inflation rate.

The price index for fuel oil also rose 3.3 percent, while the indexes for natural gas services and electricity services dropped 0.4 percent and 0.5 percent respectively. June’s 3.3 percent increase in gasoline prices is almost sure to be reversed when PCE data for July are released. Based on weekly retail price data from the Department of Energy, gasoline prices look to be down roughly 5 percent in July as compared with June. About a percentage point of that decline is the normal seasonal effect for July, leaving a roughly 4 percent seasonally adjusted drop. We would thus expect gasoline prices to subtract a bit more than three quarters of an annualized percentage point off July’s headline PCE inflation rate.

Food Prices Down Broadly Again

Food prices fell an annualized 2.7 percent in June; this follows as 5.4 percent annualized decline in May. Prices fell for both less-processed and more-processed food items, though more sharply for the former. Our price index consisting of less-processed items declined by an annualized 7.6 percent in June, while our index of more-processed items declined an annualized 0.8 percent.

Overall food prices have declined in six of the last 12 months and are down 0.9 percent from June 2015. Over the same period, prices for less-processed items have fallen 3.4 percent, while prices for more-processed items have been essentially unchanged.

Core Goods Prices Decline; Health Care Weighs on Core Services

Prices for core goods fell in June at a 2.5 percent annualized rate, after declining at a 1.2 percent rate in May. Outsized price declines for jewelry (annualized –26.6 percent), shoes and other footwear (–17.7 percent), and sporting equipment, supplies, guns and ammunition (–17.2 percent) all made notable negative impacts on June’s headline inflation rate. Prices for prescription drugs, up an annualized 16.6 percent, made the largest positive contribution among core goods.

The 12-month change in our index of core goods prices ticked down to –0.6 percent from –0.5 percent in May. As we have noted several times in the Inflation Update, 12-month rates around –0.5 percent are roughly in line with the longer-term average rate of decline for core goods prices.

Meanwhile, the rate of increase in the prices of core services slowed somewhat, coming in at an annualized 2 percent rate in June after averaging a roughly 3 percent annualized rate in April and May. Unusually slow growth in the prices of health care services was a main factor behind June’s slower rate of increase. Prices for core services apart from health care services increased at a 2.9 percent annualized rate for the month.

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 3.6 percent annualized rate in June, following rates of 3.6 percent and 3.9 percent in April and May. Individually, rent rose at a 4.4 percent annualized rate, OER rose at a 4.0 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 2.1 percent annualized rate. The rate of increase in rent has now exceeded an annualized 4 percent for three consecutive months.

For the 12 months through June, the big three index is up 3.2 percent, identical to the 12 months through May. Over the same period, rent is up 3.8 percent, OER is up 3.2 percent and the price index for other purchased meals is up 2.6 percent.

Prices of core services as a whole rose 2.3 percent for the 12 months ending in June, 0.1 percentage points below their 12-month increase through May.

—Jim Dolmas
August 5, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update