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Behind the Numbers: PCE Inflation Update, July 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 1.1 percent annualized rate in July, following a negligible increase in June. The price index for PCE excluding food and energy rose also at a 1.1 percent annualized rate, with prices for core goods rising at a 1.1 percent annualized rate, and prices for core services rising at a 1.0 percent annualized rate. Energy prices fell 0.1 percent for the month (not annualized). Food prices, as a whole, rose at a 2.1 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.4 percent in July, similar to the trimmed mean inflation rates recorded in the prior three months (an average 1.5 percent).

The 12-month trimmed mean inflation rate ticked down to 1.6 percent from 1.7 percent in June. The 12-month headline inflation held steady at 1.4 percent, while the 12-month inflation rate for PCE excluding food and energy ticked down to 1.4 percent from 1.5 percent.

Prices for Energy Goods and Services Close to Unchanged

The price index for gasoline (and other motor fuel) was unchanged in July, a touch softer than our expectation in last month’s Inflation Update of a 0.4 percent increase. As a result, for the first time in many months, gasoline made no significant contribution—positive or negative—to the headline inflation rate.

Among other energy goods and services, the price index for fuel oil fell 2.0 percent, and the price index for natural gas services fell 2.3 percent, while the price index for electricity services rose 0.4 percent. The price index for energy goods and services taken as a whole declined a scant 0.1 percent for the month.

The price index for gasoline is up 3.1 percent for the 12 months ending in July; it had been down 0.3 percent for the 12 months ending in June. Compared with July 2016, the price index for fuel oil is up 3.6 percent, the price index for natural gas services is up 7.5 percent and the price index for electricity services is up 2.6 percent. Over the same period, the price index for energy goods and services as a whole is up 3.3 percent.

The price index for gasoline and other motor fuel should show a sharp increase when PCE data for August are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 3.3 percent increase in August. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for August—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 5.6 percent seasonally adjusted increase. An increase of that size would add about 1.4 annualized percentage points to August’s headline inflation rate.

Note that the last DOE data are from August 28, and so do not incorporate much—if any—impact from Hurricane Harvey. More complete data for the month may very well show a larger increase in August. Higher prices are also likely in September, given the temporary loss of refining capacity caused by the hurricane.

Food Prices Rise

After two monthly declines, food prices reversed course in July, rising at a 2.1 percent annualized rate. The increase was driven primarily by prices for less-processed food items, which rose at an annualized rate of 4.9 percent. Prices for more-processed items rose at an annualized rate of 1.0 percent.

The price index for food as a whole is up 0.2 percent over the past 12 months, the index’s first 12-month increase since April 2016. The 0.2 increase reflects a 0.7 percent increase in the prices of less-processed items and a less than 0.1 percent increase in the prices of more-processed items.

Core Goods Prices Rise, Services Prices Up Modestly

Prices for core goods broke a string of four straight monthly declines in July, rising by an annualized 1.4 percent.

Among core goods, the price index for clocks, lamps, lighting fixtures and other household decorative items (down an annualized 47.0 percent) had the biggest negative impact on headline inflation, subtracting about 0.2 annualized percentage points off July’s headline rate. At the other end of the spectrum, the price index for prescription drugs rose at an annualized rate of roughly 17 percent and added about 0.5 annualized percentage points to July’s headline inflation rate.

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

Prices for core services, meanwhile, rose at a 1.0 percent annualized rate in July. This follows a 2.2 percent annualized increase in June. Outsized declines were recorded by the price index for hotel and motel services (down an annualized 45.1 percent), the price index for the financial service charges, fees and commissions (down an annualized 14.1 percent) and the price index for airline services (down an annualized 39.9 percent). The three service components combined to subtract about a full annualized percentage points off July’s headline inflation rate. The price index for the nonfee services of “other depository institutions and regulated investment companies” rose at a 13.8 percent annualized rate and contributed roughly 0.2 annualized percentage points to July’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 3.1 percent annualized rate in July, similar to its 3.3 percent rate of increase in June. Individually, rent rose at a 3.0 percent annualized rate, OER rose at a 3.3 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 2.7 percent annualized rate. For rent, July’s increase was the smallest since December 2014.

For the 12 months through July, the big three index is up 3.1 percent, down 0.1 percentage points from its increase for the 12 months through June. The price index for core services as a whole rose 2.0 percent for the 12 months ending in July, down 0.2 percentage points from the index’s 12-month increase through June.

—Jim Dolmas
August 31, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update