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Behind the Numbers: PCE Inflation Update, October 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 3 percent annualized rate in October, after rising at a 2.5 percent rate in September. As was the case in September, a hefty increase in the price index for gasoline and other motor fuel was a major contributor to the headline inflation rate. Food prices fell for a sixth straight month, prices for core goods fell slightly, and prices for core services rose moderately. The price index for PCE excluding food and energy—the conventional core PCE price index—rose at a 1.4 percent annualized rate, after rising at a 1.2 percent rate in September.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 2.1 percent in October, up from an annualized 1.7 percent in September.

The 12-month trimmed mean rate for October ticked up to 1.8 percent, breaking a string of nine straight months at 1.7 percent. The 12-month trimmed mean rate had been 1.6 percent through most of 2015.

The 12-month headline inflation rate also increased, from 1.2 percent in September to 1.4 percent in October, its highest level since October 2014. 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 further pickup in the headline inflation rate over the next 12 months.

Gasoline Gives Major Boost to Headline Inflation

All the major energy components of PCE registered increases in October. Taken as a whole, prices for energy goods and services rose 3.8 percent in October, led by a 6.9 percent increase in the price index for gasoline and other motor fuels. The gasoline index alone contributed about 1.6 annualized percentage points to October’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 5.9 percent increase, while the price indexes for electricity and natural gas services rose 0.4 percent and 0.9 percent, respectively.

For the 12 months through October, the price index for energy goods and services was down just 0.1 percent; it had been down 3.5 percent for the 12 months through September. November’s PCE data is likely to show the index to be up on a 12-month basis for the first time since July 2014; a one-month gain of just 0.5 percent or better in November is all it would take to push the 12-month rate into positive territory.

Such a gain is likely, given what we know of the behavior of gasoline prices in November. Weekly retail price data from the Department of Energy (DOE), combined with information about the seasonal pattern in gasoline prices, show gasoline prices on track for an increase in November that—while smaller than the increases recorded in September or October—is nevertheless sizable. In recent years, a typical November sees a 5 percent decline in the price of gasoline purely from seasonal changes in supply and demand. The DOE data—which are not seasonally adjusted—show gasoline prices on track for just a 2.7 percent decline in November. A 2.7 percent decline when a 5 percent seasonal decline is expected corresponds to a seasonally adjusted increase of 2.3 percent.

That 2.3 percent seasonally adjusted increase—assuming the projection is confirmed in PCE data for November—would imply a contribution from gasoline to November headline inflation of about 0.5 annualized percentage points. It would also produce an increase in the price index for all energy goods and services of substantially more than 0.5 percent, assuming the behavior of other components is not too different from what we saw in October.

Food Prices Down Again

Food prices fell for a sixth straight month in October, with the PCE price index for food and beverages purchased for off-premises consumption declining by an annualized 0.6 percent. The October decline was similar in magnitude to September’s, but the breakdown between less-processed and more-processed food items was very different.

Prices for more-processed items snapped a string of five straight months of declines, rising at an annualized 1 percent rate in October, while prices of less-processed items fell at a 4.5 percent annualized rate. In September, prices for more-processed items fell at a 0.9 percent rate, while prices for less-processed items were close to unchanged.

The price index for food as a whole is down 1.8 percent over the past 12 months, reflecting a 4.7 percent decline in prices of less-processed items and a 0.6 percent decline in the prices of more-processed items.

Core Goods Prices Fall; Services Prices Up Moderately

Core goods prices fell at a 0.6 percent annualized rate in October, close to September’s 0.7 percent annualized decline. Large declines in the price indexes for newspapers and periodicals (down an annualized 19 percent) and games, toys and hobbies (down an annualized 14 percent) combined to subtract about 0.2 annualized percentage points off October’s headline inflation rate. Those declines were roughly offset by outsized increases in the price indexes for furniture (up an annualized 15 percent) and jewelry (up an annualized 21 percent).

The 12-month inflation rate in the price index for core goods held steady at –0.3 percent.

Core services prices, meanwhile, rose at a moderate 2 percent annualized rate in October, in line with rates of increase in August and September. Among items posting outsized price movements, communication services (down an annualized 7 percent), physicians’ services (down an annualized 2.5 percent), and hotel and motel services (up an annualized 24 percent) had the largest impacts on October’s headline inflation rate, with each subtracting or adding about 0.2 annualized percentage points.

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 October. Individually, rent rose at a 4.8 percent annualized rate and OER rose at a 3.7 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.7 percent annualized rate. The 4.8 percent annualized increase in rent was its largest one-month gain since June 2008.

For the 12 months through October, the big three index is up 3.3 percent, compared with 3.2 percent for the 12 months through September. Individually, rent was up 3.8 percent for the 12 months through October, OER was up 3.4 percent and the price index for other purchased meals, 2.4 percent.

Prices of core services as a whole rose 2.4 percent for the 12 months ending in October. The 12-month percentage change in core services prices has been steady at 2.4 percent since May of this year.

—Jim Dolmas
November 30, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update