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Behind the Numbers: PCE Inflation Update, March 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 fell at a 2.7 percent annualized rate in March. The price index for PCE excluding food and energy declined at a 1.6 percent annualized rate, with prices for core goods falling at a 4.6 percent annualized rate, and prices for core services falling at a 0.6 percent annualized rate. Energy prices fell 3.4 percent for the month (not annualized), driven by a 6.1 percent decline in the price index for gasoline and other motor fuel. Food prices rose at a 4.6 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 0.8 percent in March, following a 1.9 percent annualized rate in January.

The 12-month trimmed mean inflation rate ticked down to 1.8 percent from 1.9 percent a month earlier. The 12-month headline inflation rate declined to 1.8 percent from 2.1 percent, while the 12-month inflation rate for PCE excluding food and energy declined to 1.6 percent from 1.8 percent.

Gasoline Prices Down Significantly in March

As noted above, the price index for gasoline (and other motor fuel) fell 6.1 percent in March. Gasoline alone subtracted about 1.5 annualized percentage points from March’s headline inflation rate, in the sense that a price index of all items apart from gasoline would have fallen at only a 1.2 percent annualized rate in March, rather than at the 2.7 percent rate recorded by the all-items index.

Among other energy goods and services, the price index for fuel oil fell 0.8 percent, the price index for natural gas services fell 0.8 percent and the price index for electricity services fell 0.1 percent.

In spite of these price declines, the price index for energy goods and services is up 13.2 percent over the 12 months ending in March. Over the same period, the price index for gasoline and other motor fuel rose 23.0 percent, the price index for fuel oil rose 24.9 percent, and the price index for natural gas services rose 11.8 percent. The price index for electricity services, which is generally much less volatile than the other major energy components, rose 1.5 percent.

The price index for gasoline and other motor fuel should show a slight increase when PCE data for April are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices rose roughly 3.7 percent in April. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for April—what we would expect given normal changes in supply and demand conditions—is roughly a 2.8 percent increase, making the DOE data consistent with a 0.9 percent seasonally adjusted increase. That would be a relatively small movement for the gasoline and motor fuels price index, resulting in only a negligible impact on April’s headline PCE inflation rate.

Food Prices Post Second Significant Monthly Gain

Food prices rose 4.6 percent at an annualized rate in March. This follows February’s 1.8 percent annualized increase and represents the largest one-month increase for food prices in the PCE since May 2014.

Prices for both less-processed and more-processed food items rose noticeably in March. Prices for less-processed items increased by an annualized 8.0 percent, their largest one-month gain since June 2015. Prices for more-processed food items increased by an annualized 3.4 percent, their largest gain since April 2016.

The price index for food as a whole is down 0.7 percent over the past 12 months, as prices for less-processed items fell 2.3 percent while prices for more-processed items were essentially unchanged.

Core Goods and Core Services Prices Both Down in March

After two monthly increases, prices for core goods fell sharply in March, declining by an annualized 4.6 percent, their steepest decline since May 2003. Among core goods, the price indexes for men’s and boys’ clothing (down roughly 29 percent at an annualized rate), used light trucks (down nearly 19 percent at an annualized rate) and used autos (down nearly 24 percent at an annualized rate) had the biggest negative impacts on headline inflation, combining to subtract nearly half an annualized percentage point off March’s headline rate. At the other end of the spectrum, the price index for “prerecorded and blank audio discs/tapes/digital files/downloads” rose at an annualized rate of roughly 94 percent and added about 0.1 annualized percentage points to March’s headline inflation rate.

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

Prices for core services, meanwhile, declined at a 0.6 percent annualized rate in March, after rising at a 2.6 percent annualized rate in February. Declines in the price index for core services are rare—the last decline was in September 2001.

March saw a number of outsized price declines within, most notably, the price index for communication services (down an annualized 32.8 percent), the price index for the consumption expenditures of nonprofit institutions serving households (down an annualized 12.7 percent) and the price index for hotel and motel services (down an annualized 29.2 percent). The three components combined to subtract about 1.4 annualized percentage points off March’s headline inflation rate (and about 2.4 annualized percentage points off the rate of increase in core services prices in March).

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 2.3 percent annualized rate in March, its slowest one-month rate of increase in three years. Slower growth in OER—the largest of the three components—was the main factor. OER rose at a 2.0 percent annualized rate—its slowest rate of increase since July 2013—while rent rose at a 3.4 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 2.0 percent annualized rate.

For the 12 months through March, the big three index is up 3.3 percent, down from a 3.4 percent increase for the 12 months through February. Prices of core services as a whole rose 2.3 percent for the 12 months ending in March, down 0.2 percentage points from their 12-month increase through February.

—Jim Dolmas
May 5, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update