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Behind the Numbers: PCE Inflation Update, November 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 effectively unchanged in November, increasing less than 0.1 percent on a monthly basis, or just 0.5 percent at an annualized rate. Food prices fell for a seventh straight month, partly offsetting an increase in the prices of energy goods and services. The price index for PCE excluding food and energy—the conventional core PCE price index—was also effectively unchanged in November, rising less than 0.1 percent on a monthly basis and just 0.1 percent at an annualized rate. Prices for core goods fell by an annualized 4.8 percent, while prices for core services rose an annualized 1.8 percent.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.1 percent in November, down from an annualized 2.2 percent in October.

The 12-month trimmed mean inflation rate held steady at 1.8 percent. The 12-month headline rate was also unchanged from October, at 1.4 percent, while the 12-month core rate declined to 1.6 percent from 1.8 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. The gap, which had been a full percentage point at the end of 2015, has now narrowed to 0.4 percentage points. We continue to expect a further pickup in the headline inflation rate over the next 12 months.

Gasoline Provides Boost to Energy Price Index

A 2.6 percent increase in the price index for gasoline and other motor fuel outweighed declines in other major energy components to produce a 1.3 percent increase in the prices of energy goods and services taken as a whole. Gasoline alone contributed about 0.6 annualized percentage points to November’s headline inflation rate.

Among other energy components, fuel oil and natural gas recorded price declines of 1.2 percent and 0.4 percent, respectively. The price index for electricity services was unchanged from a month earlier.

For the 12 months through November, the price index for energy goods and services was up 0.8 percent—its first 12-month increase since crude oil prices plummeted in the second half of 2014.

The energy price index is likely to show a further increase when PCE data for December are released. Weekly retail price data from the Department of Energy (DOE) put gasoline prices in December on track for a 2.3 percent increase. Those DOE data are not seasonally adjusted. Taking account of the typical seasonal pattern in gasoline prices—a normal December sees a price decline of about 1.2 percent—the DOE data show gasoline prices on track for a seasonally adjusted increase of about 3.5 percent in December. If that gain, slightly larger than November’s, is realized, gasoline would end up contributing about 0.8 annualized percentage points to December’s headline PCE inflation rate.

Food Prices Continue to Fall

Food prices fell for a seventh straight month in November, with the PCE price index for food and beverages purchased for off-premises consumption declining by an annualized 2.1 percent.

Prices for more-processed food items, which had snapped a string of five consecutive declines in October, fell again in November, by an annualized 1.6 percent. Prices for less-processed food items fell an annualized 3.4 percent, led by sharp declines in the prices of fresh milk and fresh produce.

The price index for food as a whole is down 1.7 percent over the past 12 months, reflecting a 4.8 percent decline in the prices of less-processed items and a 0.5 percent decline in the prices of more-processed items.

Core Goods Prices Record Largest Decline Since 2003

Core goods prices fell sharply in November, declining by an annualized 4.8 percent, their largest one-month rate of decline since May 2003. November’s decline was, in fact, the fourth largest for the series, which goes back to 1959. Sharp declines in the prices of prescription drugs, televisions and men’s and boys’ clothing were major contributors. Prescription drug prices alone—down 7.4 percent at an annualized rate—subtracted about 0.3 annualized percentage points from November’s headline inflation rate.

Prices for core goods are down 0.6 percent for the 12 months ending in November; they had been down 0.3 percent on a 12-month basis through October.

Prices for core services, meanwhile, rose at a modest 1.8 percent annualized rate in November.Among items posting outsized price movements, hotel and motel services (down an annualized 15.6 percent) and spectator sports admissions (down an annualized 46.8 percent) had the largest impacts on November’s headline inflation rate, with each subtracting a bit more than 0.1 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 3.3 percent annualized rate in November. Individually, rent rose at a 4.2 percent annualized rate and OER rose at a 3.9 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.0 percent annualized rate. Rates of increase for the latter have dropped off noticeably over the past three months. For the three months ending in November, the other purchased meals index rose at an annualized rate of 1.5 percent, compared with an annualized rate of 2.8 percent over the first eight months of 2016.

For the 12 months through November, the big three index is up 3.3 percent, identical to its increase for the 12 months through October. Individually, rent was up 3.9 percent over the same period, OER was up 3.5 percent and the price index for other purchased meals, 2.3 percent.

Prices of core services as a whole rose 2.4 percent for the 12 months ending in November, down from 2.5 percent for the 12 months ending in October.

—Jim Dolmas
December 22, 2016

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update