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Behind the Numbers: PCE Inflation Update, December 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 rose 1.9 percent at an annualized rate in December, driven in part by a 2.9 percent increase in the price index for gasoline and other motor fuel. The price index for PCE excluding food and energy rose 1.3 percent at an annualized rate, with prices for core services rising at a 2.0 percent annualized rate and prices for core goods declining at a 0.7 percent annualized rate. Food prices fell again in December, marking an eighth straight monthly decline.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.8 percent for the month, up from an annualized 1.2 percent in November.

The 12-month trimmed mean inflation rate held steady at 1.8 percent for a third straight month. The 12-month headline inflation rate increased to 1.6 percent from 1.4 percent in November, while the 12-month inflation rate for PCE excluding food and energy held steady 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. The gap, which had been a full percentage point at the end of 2015, has now narrowed to 0.2 percentage points. We continue to expect a further pickup in the headline inflation rate over the next 12 months.

Gasoline, Fuel Oil Prices Up in December

Prices for energy goods and services rose 1.7 percent in December, led by the 2.9 percent increase in the price index for gasoline and other motor fuel noted above. Gasoline and other motor fuel contributed about 0.7 annualized percentage points to December’s headline inflation rate.

The price indexes for other energy components were mixed, with fuel oil up 6 percent, electricity services unchanged and natural gas services down 0.4 percent.

Over the 12 months ending in December, the price index for energy goods and services rose 5.7 percent. Over the same period, the price index for gasoline and other motor fuel rose 9.1 percent, the price index for fuel oil rose 12.7 percent, and the price index for natural gas services rose 7.8 percent. The price index for electricity services, which is generally much less volatile than the other major energy components, rose 0.7 percent.

The energy price index is likely to show a further increase when PCE data for January are released. Weekly retail price data from the Department of Energy (DOE) put gasoline prices in January on track for a 4.4 percent increase. Those DOE data are not seasonally adjusted, however. The seasonal pattern in January gasoline prices has shifted over the past few years, but most recently—in January 2016—showed a 0.3 percent increase from seasonal supply and demand factors. Taking this into account, the DOE data show gasoline prices on track for a seasonally adjusted increase of about 4.1 percent in January. With a price increase of that size, gasoline would end up contributing about a full annualized percentage point to January’s headline PCE inflation rate.

Food Prices Continue Slide

Food prices fell for an eighth straight month in December, with the PCE price index for food and beverages purchased for off-premises consumption declining by an annualized 1.5 percent.

Prices for more-processed food items rose an annualized 0.8 percent in December, but the increase was more than offset by an annualized 7.2 percent decline in the prices of less-processed food items. Large price declines for meats, fresh produce and eggs all contributed to the decline in our price index for less-processed food items.

The price index for food as a whole is down 1.6 percent over the past 12 months, reflecting a 4.8 percent decline in the prices of less-processed items and a 0.3 percent decline in the prices of more-processed items.

Core Goods Prices Down, Services Prices Rise Modestly

Core goods prices fell in December, declining by an annualized 0.7 percent, up from an annualized 4.5 percent decline in November. Prices for apparel, household linens and jewelry all recorded outsized declines and combined to subtract about 0.6 annualized percentage points off December’s headline inflation rate.

For the 12 months ending in December, prices for core goods are down 0.4; they had been down 0.5 percent on a 12-month basis through November.

Prices for core services, meanwhile, rose at a modest 2 percent annualized rate in December. Among items posting outsized price movements, air transportation (down an annualized 28.5 percent) and the price index for the nonfee services of other depository institutions and regulated investment companies (up an annualized 30.7 percent) had the largest impacts on December’s headline inflation rate with the former subtracting about 0.2 annualized percentage points and the latter adding about 0.3 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 3.2 percent annualized rate in December. Individually, rent rose at a 3.9 percent annualized rate and OER rose at a 3.4 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.9 percent annualized rate.

For the 12 months through December, the big three index is up 3.4 percent, 0.1 percentage points higher than its increase for the 12 months through November. Prices of core services as a whole rose 2.4 percent for the 12 months ending in December, unchanged from their 12-month increase through November.

—Jim Dolmas
January 30, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update