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Behind the Numbers: PCE Inflation Update, August 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 1.7 percent annualized rate in August, with price increases for core goods and services offset to a small extent by price declines for food and energy. The price index for PCE excluding food and energy—the conventional core PCE price index—increased at a 2.2 percent annualized rate, with core goods prices rising at a 2.1 percent annualized rate and core services prices rising at a 2.2 percent annualized rate. Prices for energy goods and services fell slightly (–0.1 percent), while food prices fell an annualized 1.9 percent.

The Dallas Fed’s trimmed mean PCE inflation rate for August was an annualized 1.6 percent, in line with readings for June and July (both 1.4 percent).

The 12-month trimmed mean rate for August was 1.7 percent, unchanged from a (revised) 1.7 percent rate in July. The 12-month trimmed mean rate has been steady at 1.7 percent throughout 2016; it had been 1.6 percent through most of 2015.

The 12-month headline inflation rate increased to 1.0 percent from 0.8 percent in July, while the 12-month core inflation rate ticked up to 1.7 percent from 1.6 percent in July.

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 next 12 months.

Energy Prices Mixed in August

The PCE price index for gasoline and other motor fuel fell 0.9 percent in August. For gasoline, this counts as a modest decline; among all one-month declines in the gasoline price index over the past 20 years, the median decline is 2.2 percent.

Among other energy goods and services, the fuel oil price fell in August, while electricity and natural gas services posted increases. The price increase for natural gas services, 2.1 percent, was particularly sharp and follows a 3.1 percent increase in July.

Taken as a whole, prices for energy goods and services fell 0.1 percent from July to August. Energy prices remain down nearly 10 percent from a year ago.

Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a seasonally adjusted increase in September. The DOE data—which are not seasonally adjusted—have gasoline prices on track for a 1.9 percent increase. A typical September, though, would see a decline of 3.2 percent due to seasonal supply and demand factors. Taking account of the seasonal price pattern, the DOE data point to a 5.1 percent seasonally adjusted increase in the price of gasoline.

If that projection holds up, gasoline would end up contributing about 1.1 annualized percentage points to September’s headline PCE inflation rate.

Food Prices Down Again

Food prices fell for a fourth consecutive month in August, declining 1.9 percent at an annualized rate. In contrast with June and July—and similar to May—the price declines were uniform across our categories of more-processed and less-processed food items; both groupings fell in price by about an annualized 1.9 percent.

Of some note is the recent behavior of egg prices. A year ago, we were writing about the “eggpocalypse”—a nearly 30 percent rise in the price of eggs between last May and last August. This August, egg prices declined 6.6 percent from a month earlier, their seventh monthly decline this year and the 11th in the past 12 months. Having recovered their pre-eggpocalypse level a few months ago, egg prices are now at a level last seen in mid-2011.

Overall food prices are down 1.4 percent from August 2015, with the prices of less-processed items (down 4.4 percent) accounting for the bulk of the 12-month drop. Prices of more-processed food items are down 0.3 percent from a year ago.

Core Goods Prices Post Sharp Increase

Prices for core goods snapped a string of three straight monthly declines with a 2.1 percent annualized increase in August. The increase was driven in part by sharp increases in the prices of jewelry (up an annualized 48.0 percent) and prescription drugs (up an annualized 16.9 percent). Prescription drug prices, which have increased sharply over the past several months, are up 6.3 percent from August 2015. That 12-month rate of increase has only been approached or exceeded a few times over the past 20 years.

The 12-month change in core goods prices was –0.3 percent in August, up from –0.6 percent in July.

Prices for core services rose at a 2.2 percent annualized rate in August, following a 2.4 percent annualized increase in July. Among the components of core services, the price index for the consumption expenditures of nonprofit institutions serving households made the largest positive contribution to headline inflation in August—increasing at a roughly 15 percent annualized rate and contributing a little over 0.3 annualized percentage points to August’s headline rate. At the other end of the spectrum, paramedical services (down an annualized 1.1 percent) made the largest negative contribution, shaving about a tenth of an annualized percentage point off August’s headline rate.

Our “big three” price index—aggregating three of the largest and least volatile components of core services: rent, owners’ equivalent rent (OER) and the price of dining out—rose at a 3.4 percent annualized rate in August. Individually, rent rose at a 3.9 percent annualized rate and OER rose at a 3.5 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 2.6 percent annualized rate.

For the 12 months through August, the big three index is up 3.2 percent, identical to its 12-month changes in each of the prior three months. Individually, rent was up 3.8 percent over the same period, OER was 3.3 percent and the price index for other purchased meals, 2.6 percent. The individual 12-month changes were all unchanged from July.

Prices of core services as a whole rose 2.4 percent for the 12 months ending in August, identical to their change over the 12 months ending in July.

—Jim Dolmas
September 30, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update