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Behind the Numbers: PCE Inflation Update, September 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 2.6 percent annualized rate in September, boosted by a nearly 6 percent increase in the price index for gasoline and other motor fuel. Food prices fell for a fifth straight month. Core goods prices fell at a 0.7 percent annualized rate, while core services prices rose at a 2 percent rate. The price index for PCE excluding food and energy—the conventional core PCE price index—rose at a 1.3 percent annualized rate, down from a 2.4 percent annualized rate in August.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.9 percent in September, up from an annualized 1.4 percent in August.

The 12-month trimmed mean for September was 1.7 percent, unchanged from August. 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 1.2 percent from 1 percent in August, while the 12-month core inflation rate was unchanged at 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 next 12 months.

Energy Items Up in Price in September

All the major energy components of PCE registered increases in September. Taken as a whole, prices for energy goods and services rose 3 percent in September, led by a 5.7 percent increase in the price index for gasoline and other motor fuels. The gasoline index alone contributed about 1.2 annualized percentage points to September’s headline inflation rate; an index of all items other than gasoline would have increased at a 1.4 percent annualized rate for the month.

Among other energy components, fuel oil recorded a 2.4 percent increase, while the price indexes for electricity and natural gas services rose 0.7 percent and 0.8 percent, respectively.

For the 12 months through September, the price index for energy goods and services fell 3.5 percent, up from a 10 percent decline for the 12 months through August.

Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a substantial increase in October. A typical October would see a decline in gasoline prices of 4.8 percent due to seasonal supply and demand factors. The DOE data for October thus far—which are not seasonally adjusted—show gasoline prices on track for a 1.6 percent increase. A 1.6 percent unadjusted increase when a 4.8 percent seasonal decline is expected translates into a 6.4 percent seasonally adjusted increase.

If that projection holds up, gasoline would end up contributing about 1.4 annualized percentage points to October’s headline PCE inflation rate, similar to its contribution in September.

Food Prices Continue to Slide

Food prices—more formally, the price index for food and beverages purchased for off-premises consumption—fell an annualized 0.6 percent in September and have declined in nine of the past 11 months. September’s drop reflects a 0.9 percent annualized decline in prices of more-processed food items. Prices of less-processed food items, taken together, were essentially unchanged from August.

Notable price movements included a nearly 30 percent annualized increase in the price of fresh milk. This follows an annualized increase of 15 percent in August. Nevertheless, the price of fresh milk remains down 3.3 percent on a 12-month basis.

The price index for food as a whole is down 1.7 percent over the past 12 months, reflecting a 4.5 percent decline in prices of less-processed items and a 0.5 percent decline in prices of more-processed items.

Core Goods Prices Down; Services Up Moderately

After recording a sharp 3.2 percent annualized increase in August, core goods prices fell an annualized 0.7 percent in September. Large declines in the prices of jewelry (down an annualized 32.4 percent) and men’s and boys’ clothing (down an annualized 14.5 percent) more than offset a 10.1 percent annualized increase in the price index for prescription drugs. Prescription drugs prices have risen sharply through most of 2016, rising 7.2 percent from December 2015 to September 2016. That increase is the largest over nine months—by a wide margin—since the nine months ending in September 1991.

The 12-month change in core goods prices ticked down to –0.3 percent from –0.2 percent in August.

Meanwhile, prices for core services rose at a 2 percent annualized rate in September, similar to their rate of increase in August. The price indexes for hotel and motel services and for airline services recorded notable increases (annualized 14.6 percent and 24.8 percent, respectively). Health care services continue to post historically modest price increases, with the PCE price index for health care rising just an annualized 0.9 percent in September and 1.1 percent for the 12 months ending in September.

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 3.6 percent annualized rate in September. Individually, rent rose at a 3.5 percent annualized rate and OER rose at a 4.4 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.9 percent annualized rate.

For the 12 months through September, the big three index is up 3.2 percent, identical to its 12-month changes in each of the prior four months. Individually, rent was up 3.7 percent over the same period, OER was up 3.4 percent and the price index for other purchased meals, 2.5 percent.

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

—Jim Dolmas
October 31, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update