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Behind the Numbers: PCE Inflation Update, July 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 was essentially unchanged in July after increasing at a 1.3 percent annualized rate in June. Price declines for energy goods and services, food and core goods offset an increase in prices of core services. The core PCE price index—PCE excluding food and energy—rose at a 1.1 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 0.8 percent, its slowest one-month rate since April 2013. As a result, the 12-month trimmed mean rate ticked down to 1.6 percent from 1.7 percent in June.

The 12-month headline inflation rate also ticked down to 0.8 percent from 0.9 percent, while 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 Down in July

The PCE price index for gasoline and other motor fuel fell 4.6 percent in July and was the single largest drag on headline inflation for the month. An index of all items except gasoline would have increased at a 1.1 percent annualized rate in July.

Other energy items were mixed, with fuel oil down 1.3 percent, electricity services up 0.5 percent and natural gas services up a hefty 3.1 percent. Taken as a whole, prices for energy goods and services were down 1.8 percent for the month, snapping a string of four consecutive monthly increases.

Prices for energy goods and services remain down from year-earlier levels, with the steepest declines being for gasoline and fuel oil (down roughly 20 percent and 18 percent, respectively). The price indexes for electricity and natural gas services are down 1 percent and 0.4 percent from July 2015.

Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a modest seasonally adjusted decline in August. The DOE data—which are not seasonally adjusted—have gasoline prices on track for a 3.2 percent decline. In recent years, a typical August sees a 2.1 percent decline purely from seasonal supply and demand factors, so the DOE data are consistent with a 1.1 percent seasonally adjusted drop. A decline of that size—about a quarter the size of July’s—would subtract about a quarter of an annualized percentage point off August’s headline PCE inflation rate.

Food Price Declines Continue

Food prices fell for a third consecutive month in July, declining 1.1 percent at an annualized rate. This follows annualized declines of 5.4 percent and 2.7 percent in May and June.

As was the case in June, price declines were more pronounced among less-processed food items. Our price index consisting of less-processed items fell an annualized 3.6 percent in July, while our index of more-processed items was down a negligible amount (just 0.2 percent annualized).

The pattern of price declines in July for food as whole and its less-processed and more-processed categories coincidentally matches closely the pattern of price declines in these groupings over the past 12 months. From July 2015, overall food prices are down 1.2 percent, while prices for less-processed items are down 3.7 percent, and prices for more-processed items are down 0.2 percent.

Core Services Post Another Modest Gain

Prices for core goods fell at a 1 percent annualized rate in July. As was the case in June, outsized price movements for prescription drugs (up an annualized 11.7 percent) and jewelry (down an annualized 19.5 percent) made the most notable positive and negative impacts on headline inflation.

The 12-month change in our index of core goods prices held steady at —0.6 percent, which is roughly in line with the longer-term average rate of price decline for core goods.

Prices for core services rose at a 1.8 percent annualized rate, following a 2.1 percent rate of increase in June. Among the components of core services, hotel and motel services (down an annualized 28.3 percent) made the largest negative contribution to headline inflation in July, subtracting roughly 0.3 annualized percentage points. At the other end of the spectrum, paramedical services (up an annualized 7.3 percent) and legal services (up an annualized 21.5 percent) combined for a similar-sized positive contribution.

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 3.2 percent annualized rate in July. Individually, rent rose at a 3.3 percent annualized rate, OER rose at a 3.5 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 2.5 percent annualized rate. July’s rate of increase in rent breaks a string of three straight months with rates of increase that exceeded an annualized 4 percent. OER had posted rates of increase of 4 percent or better in each of the prior two months.

For the 12 months through July, the big three index is up 3.2 percent, unchanged from a month earlier. The 12-month change in OER ticked up to 3.3 percent from 3.2 percent in June. The 12-month changes in rent and the price index for other purchased meals held steady at 3.8 percent and 2.6 percent, respectively.

Prices of core services as a whole rose 2.3 percent for the 12 months ending in July, 0.1 percentage points below their 12-month increase through June. The rate of increase in core services prices remains well below their longer-run average rate, which was roughly 2.9 percent per year over the 15 years prior to the 2007—09 recession.

—Jim Dolmas
August 29, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update