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Behind the Numbers: PCE Inflation Update, February 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 1.6 percent annualized rate in February. The price index for PCE excluding food and energy rose at a 2.3 percent annualized rate, with prices for core goods rising at a 0.9 percent annualized rate, and prices for core services rising at a 2.8 percent annualized rate. Energy prices fell 1.3 percent for the month (not annualized), driven by a 2.9 percent decline in the price index for gasoline and other motor fuel. Food prices rose at a 1.8 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 2.0 percent in February, following a 2.2 percent annualized rate in January.

The 12-month trimmed mean inflation rate held steady in February at 1.9 percent for a third straight month. The 12-month headline inflation rate increased to 2.1 percent from 1.9 percent, while the 12-month inflation rate for PCE excluding food and energy held steady at 1.8 percent.

For the first time since July 2014, 12-month headline PCE inflation exceeds 12-month trimmed mean inflation. 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. Based on that relationship, our rule-of-thumb forecast for headline PCE inflation over the coming 12 months is always trimmed mean inflation over the prior 12 months. Applying that rule of thumb, we would expect a slight decline in the headline inflation rate in the next 12 months.

Gasoline Prices Down in February

As noted above, the price index for gasoline (and other motor fuel) fell 2.9 percent in February. Gasoline alone subtracted about 0.8 annualized percentage points from February’s headline inflation rate, in the sense that a price index of all items apart from gasoline would have increased at a 2.4 percent annualized rate in February, rather than the 1.6 percent rate recorded by the all-items index.

Among other energy goods and services, the price index for fuel oil fell 0.4 percent, while the price indexes for natural gas services and electricity services rose 1.5 percent and 0.8 percent, respectively.

Over the 12 months ending in February, the price index for energy goods and services rose 18.4 percent. Over the same period, the price index for gasoline and other motor fuel rose 33.8 percent, the price index for fuel oil rose 28.0 percent, and the price index for natural gas services rose 11.9 percent. The price index for electricity services, which is generally much less volatile than the other major energy components, rose 2.1 percent.

Gasoline’s price slide is apt to continue when PCE data for March are released. Weekly retail price data from the Department of Energy (DOE) put gasoline prices in March on track for a 0.9 percent increase. Those DOE data are not seasonally adjusted, however. The seasonal pattern for March—what we would expect given typical changes in supply and demand conditions—is roughly a 7.8 percent increase. A 0.9 percent increase when the seasonal expectation is a 7.8 percent increase implies a seasonally adjusted decline of 6.9 percent. With a price decline of that size—more than twice the size of February’s drop—gasoline would end up subtracting roughly 1.9 annualized percentage points from March’s headline PCE inflation rate.

Food Prices Post First Significant Gain Since Last April

Food prices rose 1.8 percent at an annualized rate in February, after being essentially unchanged in January. Prior to January, food prices had recorded eight straight monthly declines.

Prices for less-processed food items rose sharply in February, increasing at a 5.4 percent annualized rate. The increase follows a 0.6 percent annualized decline in January. Prices for more-processed food items rose in February by an annualized 0.4 percent, similar to their increase in January.

The price index for food as a whole is down 1.5 percent over the past 12 months, reflecting a 4.1 percent decline in the prices of less-processed items and a 0.4 percent decline in the prices of more-processed items.

Core Goods Prices Rise Again, Though Less Sharply

Core goods prices rose in February, increasing by an annualized 0.9 percent. This follows a sharp 6 percent annualized increase in January, which was driven by an unusually large jump in the prices of durable goods. In February, durable goods prices recorded a more-normal 0.5 percent annualized decline, after posting a 6.8 percent annualized increase a month earlier. Among core goods, the price index for jewelry (up at a nearly 60 percent annualized rate) had the biggest impact on headline inflation, contributing about a quarter of an annualized percentage point to February’s headline rate.

For the 12 months ending in February, prices for core goods are down 0.3 percent; they had been down 0.2 percent on a 12-month basis through January.

Prices for core services, meanwhile, rose at a 2.8 percent annualized rate in February, similar to their rate of increase in January, and a pace somewhat faster than we saw over the prior several months. Over the second half of 2016, core services prices averaged an annualized 2.3 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 14.5 percent) and the price index for communication services (down an annualized 9.1 percent) had the largest positive and negative impacts on February’s headline inflation rate. The former added about 0.3 annualized percentage points to the headline inflation rate, while the latter subtracted about a quarter of an annualized percentage point.

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 3.1 percent annualized rate in February. Individually, rent rose at a 3.6 percent annualized rate, OER rose at a 3.1 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 2.5 percent annualized rate.

For the 12 months through February, the big three index is up 3.4 percent, unchanged from its increase for the 12 months through January. Prices of core services as a whole rose 2.5 percent for the 12 months ending in February, up 0.1 percentage points from their 12-month increase through January.

—Jim Dolmas
March 31, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update