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Behind the Numbers: PCE Inflation Update, January 2017

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 at a 5.3 percent annualized rate in January. The price index for PCE excluding food and energy rose at a 3.6 percent annualized rate, with prices for core goods rising sharply at a 6 percent annualized rate, and prices for core services rising at a 2.8 percent annualized rate. Energy prices rose 4.2 percent for the month (not annualized), driven by a 7.9 percent increase in the price index for gasoline and other motor fuel. Food prices were essentially unchanged, after declining in each of the prior eight months.

The Dallas Fed’s trimmed mean PCE inflation rate was 2.4 percent annualized in January, following a 1.9 percent annualized rate in December.

The 12-month trimmed mean inflation rate for January ticked up to 1.9 percent from 1.8 percent a month earlier. The 12-month headline inflation rate increased to 1.9 percent from 1.6 percent, while the 12-month inflation rate for PCE excluding food and energy held steady at 1.7 percent.

From August 2014 through December 2016, 12-month headline PCE inflation had been running below 12-month trimmed mean inflation, at times by as much as 1.4 percentage points. As we have regularly noted in the Inflation Update, gaps between the two inflation rates, historically, have tended to be closed by the headline rate converging toward the trimmed mean rate. For the moment, with both 12-month rates at 1.9 percent, that gap has closed.

Gasoline Prices Up Sharply in January

As noted above, the price index for gasoline (and other motor fuel) rose 7.9 percent in January, its largest increase since an 8 percent jump in April 2016. Gasoline alone contributed about 1.9 annualized percentage points to January’s headline inflation rate, in the sense that a price index of all items apart from gasoline would have increased at just a 3.4 percent annualized rate in January, rather than the 5.3 percent rate recorded by the all-items index.

Among other energy goods and services, the price index for fuel oil rose 3.5 percent, and the price index for natural gas services rose 1.5 percent. The price index for electricity services was unchanged.

Over the 12 months ending in January, the price index for energy goods and services rose 11.8 percent. Over the same period, the price index for gasoline and other motor fuel rose 20 percent, the price index for fuel oil rose 24.8 percent, and the price index for natural gas services rose 11.4 percent. The price index for electricity services, which is generally much less volatile than the other major energy components, rose 1.1 percent.

Some of gasoline’s January gain is apt to be reversed when PCE data for February are released. Weekly retail price data from the Department of Energy (DOE) put gasoline prices in February on track for a 1.7 percent decline. Those DOE data are not seasonally adjusted, however. The seasonal pattern for February—what we would expect given typical changes in supply and demand conditions—is roughly a 0.8 percent increase. A 1.7 percent decline when the seasonal expectation is a 0.8 percent increase implies a seasonally adjusted decline of 2.5 percent. With a price decline of that size, gasoline would end up subtracting about half an annualized percentage point from February’s headline PCE inflation rate.

Food Prices Snap Months-Long Slide

Food prices were essentially unchanged in January, rising a negligible 0.2 percent at an annualized rate. This scant increase breaks a string of eight straight monthly declines. In fact, since a peak in October 2015, the price index for food and beverages has declined in all but three months, falling a cumulative 2.1 percent in that span of time.

Prices for more-processed food items rose an annualized 0.5 percent in January, and that increase was effectively offset by an annualized 0.6 percent decline in the prices of less-processed food items.

The price index for food as a whole is down 1.4 percent over the past 12 months, reflecting a 4.5 percent decline in the prices of less-processed items and a 0.2 percent decline in the prices of more-processed items.

Core Goods Prices Jump in January

Core goods prices rose sharply in January, increasing by an annualized 6 percent, their largest one-month gain since April 2009. Apparel prices—which are typically quite volatile—posted sharp increases in January. More notably, durable goods prices recorded their largest one-month increase since July 1991, driven by sizable price increases for the broad categories of “household furnishings and durable household equipment” and “video, audio, photographic and information processing equipment and media.”

For the 12 months ending in January, prices for core goods are down 0.2 percent; they had been down 0.4 percent on a 12-month basis through December.

Prices for core services, meanwhile, rose at a 2.8 percent annualized rate in January, a pace somewhat faster than we have seen over the past several months. Over the second half of 2016, core services prices averaged an annualized 2.2 percent rate of increase.

Among items posting outsized price movements, the price index for the consumption expenditures of nonprofit institutions serving households (up an annualized 16.3 percent) and the price index for nonprofit hospital services (down an annualized 2.6 percent) had the largest positive and negative impacts on January’s headline inflation rate. The former added about 0.3 annualized percentage points to the headline inflation rate, while the latter subtracted about 0.5 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 January. Individually, rent rose at a 3.3 percent annualized rate, OER rose at a 2.9 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 4.8 percent annualized rate.

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

—Jim Dolmas
March 1, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update