Behind the Numbers: PCE Inflation Update, June 2017
The headline, or all-items, PCE price index was essentially unchanged in June, rising at just a 0.3 percent annualized rate after falling at a 0.4 percent annualized rate in May. The price index for PCE excluding food and energy rose at a 1.3 percent annualized rate, with prices for core goods close to unchanged, and prices for core services rising at a 1.9 percent annualized rate. Energy prices fell 1.7 percent for the month (not annualized), reflecting in part a 2.8 percent decline in the price index for gasoline and other motor fuel. Food prices, as a whole, were essentially unchanged.
The Dallas Fed’s trimmed mean PCE inflation rate was also an annualized 1.3 percent in June, following a 1.6 percent annualized rate in each of the prior two months.
The 12-month trimmed mean inflation rate held steady at 1.7 percent for a third consecutive month. The 12-month headline inflation rate declined to 1.4 percent from 1.5 percent, while the 12-month inflation rate for PCE excluding food and energy held steady at 1.5 percent.
As usual for the June PCE release, the data incorporate the results of the Bureau of Economic Analysis’ annual revision to the National Income and Product Accounts. Data—including the underlying price and quantity data used to calculate the trimmed mean—were revised from 2014 forward. On average over the whole revision period, the impacts on headline, core and trimmed mean inflation were modest. Where headline inflation had averaged an annualized 1.03 percent from January 2014 to May 2017, the revised data show an average rate of 1.06 percent. For the core index, an average rate of 1.52 percent over the same period becomes an average rate of 1.55. The impact of the revised data on the trimmed mean was also a slight increase in its average rate over the revision period, from an annualized 1.67 percent to 1.71 percent.
The small average impacts over the whole revision period mask some bigger changes over shorter time intervals. In terms of its 12-month inflation rate, the largest change to the excluding food and energy measure was a 0.17 percentage-point upward revision for August 2016. Rounded to one decimal place, 12-month excluding food and energy inflation rates are now estimated to have touched 1.9 percent in five of the seven months prior to March 2017. For the trimmed mean, the largest change in absolute size was a 0.08 percentage-point upward revision for November 2014.
Prices for Energy Goods and Services Decline
The price index for gasoline (and other motor fuel) fell 2.8 percent in June, in line with our expectation in last month’s Inflation Update. Gasoline subtracted roughly 0.7 annualized percentage points from June’s headline inflation rate, in the sense that a price index of all items apart from gasoline would have risen at an annualized rate of roughly 1.0 percent in June, rather than the 0.3 annualized rate recorded by the all-items index.
Among other energy goods and services, the price index for fuel oil fell 3.7 percent, the price index for natural gas services fell 0.2 percent, and the price index for electricity services fell 0.6 percent. The price index for energy goods and services taken as a whole declined 1.7 percent for the month.
With declines in four of the past five months, the price index for gasoline and other motor fuel is now down 0.3 percent for the 12 months ending in June. Its last 12-month decline was over the period ending in October 2016. For the 12 months ending in June, the price index for fuel oil rose 4.3 percent, the price index for natural gas services rose 12.8 percent, and the price index for electricity services rose 2.5 percent. Over the same period, the price index for energy goods and services as a whole rose 2.1 percent.
The price index for gasoline and other motor fuel should show a very small increase when PCE data for July are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices declined roughly 1.9 percent in July. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for July—what we would expect given normal changes in supply and demand conditions—is roughly a 2.3 percent decline, making the DOE data consistent with a slight 0.4 percent seasonally adjusted increase. An increase of that size would add about 0.1 annualized percentage points to July’s headline inflation rate.
Food Prices Decline
Food prices fell noticeably for the first time in the past six months, declining at a 1.7 percent annualized rate in June.
The decline was driven by prices for more-processed food items, which fell at an annualized rate of 2.8 percent. The decline in prices of more-processed items was broad based, with eight of 13 component price indexes recording declines. Prices for less-processed items rose at an annualized rate of 1.5 percent.
The price index for food as a whole is down 0.1 percent over the past 12 months, reflecting a 0.1 percent decline in the prices of more-processed items and a less than 0.1 percent decline in the prices of less-processed items.
Core Goods Prices Flat, Services Prices Up
Prices for core goods were close to unchanged in June, declining by an annualized 0.2 percent. This follows three months of declines averaging an annualized 3.1 percent.
Among core goods, the price index for major household appliances (down an annualized 25.3 percent) had the biggest negative impact on headline inflation, subtracting about 0.1 annualized percentage points off June’s headline rate. At the other end of the spectrum, the price index for prescription drugs rose at an annualized rate of roughly 12 percent and added about 0.4 annualized percentage points to June’s headline inflation rate.
For the 12 months ending in June, prices for core goods are down 0.5 percent; they had been down 0.7 percent on a 12-month basis through May.
Prices for core services, meanwhile, rose at a 1.9 percent annualized rate in June. This follows a 2.6 percent annualized increase in May. Outsized declines were recorded by the price index for hotel and motel services (down an annualized 23.9 percent) and the price index for the nonfee services of “other depository institutions and regulated investment companies” (down an annualized 6.5 percent). The two service components combined to subtract about 0.3 annualized percentage points off June’s headline inflation rate. The price index for financial service charges, fees and commissions rose at an 8.0 percent annualized rate and contributed roughly 0.2 annualized percentage points to June’s headline inflation rate.
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 June, up from a 2.7 percent rate in May. Individually, rent rose at a 4.2 percent annualized rate, OER rose at a 3.5 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 1.9 percent annualized rate.
For the 12 months through June, the big three index is up 3.2 percent, identical to its increase for the 12 months through May. The price index for core services as a whole rose 2.2 percent for the 12 months ending in June, down 0.1 percentage points from the index’s 12-month increase through May.
—Jim Dolmas
August 4, 2017