Behind the Numbers: PCE Inflation Update, August 2017
The headline, or all-items, PCE price index rose at a 2.5 percent annualized rate in August, following a 1.2 percent increase in July. Sharply higher gasoline prices contributed to August’s robust headline rate. Food prices, as a whole, were close to unchanged for the month. The price index for PCE excluding food and energy rose at a 1.2 percent annualized rate, with prices for core goods falling at 1.5 percent annualized rate, and prices for core services rising at a 2.2 percent annualized rate.
The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.5 percent in August, similar to the trimmed mean inflation rates recorded in the prior three months (each 1.4 percent).
The 12-month trimmed mean inflation rate held steady at 1.6 percent for a second month. 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 1.3 percent from 1.4 percent.
Gasoline Prices Up in August; Bigger Jump Set for September
The price index for gasoline and other motor fuel rose 6.3 percent in August, a bit more than our expectation in last month’s Inflation Update (which didn’t reflect much of the impact in August from Hurricane Harvey). Gasoline alone contributed roughly 1.4 annualized percentage points to August’s headline inflation rate, in the sense that an index of all items apart from gasoline would have risen at just a 1.1 percent annualized rate, rather than the 2.5 percent rate posted by the all-items index.
Among other energy goods and services, the price index for fuel oil rose 2.9 percent, and the price index for natural gas services fell 0.5 percent, while the price index for electricity services was unchanged. The price index for energy goods and services taken as a whole rose 3.1 percent for the month.
The price index for gasoline is up 10.3 percent for the 12 months ending in August; it had been up 3.1 percent for the 12 months ending in July. Compared with August 2016, the price index for fuel oil is up 9.4 percent, the price index for natural gas services is up 5.4 percent, and the price index for electricity services—typically much less volatile than other energy components—is up 2.3 percent. Over the same period, the price index for energy goods and services as a whole is up 6.7 percent.
While August gasoline prices probably reflected some impact from Hurricane Harvey, the bulk of the impact will show up in data for September. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 10.7 percent increase in September. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for September—what we would expect given normal changes in supply and demand conditions—is roughly a 2.2 percent decline, making the DOE data consistent with a 12.9 percent seasonally adjusted increase. An increase of that size—about double August’s jump—would add about 3.1 annualized percentage points to September’s headline rate.
According to the DOE’s retail price data, gasoline prices were on average about 27 cents per gallon higher in the four weeks following Hurricane Harvey than they were in the four weeks prior. Those elevated prices may continue into October. The DOE’s latest hurricane situation report (#49, 9/28/17) notes that eight Gulf Coast refineries continue to run at reduced rates; at normal rates of operation, these refineries would account for a bit more than 14 percent of U.S. refining capacity. One refinery is still in the process of restarting; it normally accounts for 1.2 percent of U.S. capacity.
Food Prices Flat in August
After rising at a 2.1 percent annualized rate in July, food prices were close to unchanged in August (their annualized rate of change was –0.3 percent). Prices for less-processed food items declined at a modest 1.1 percent annualized rate, while prices for more-processed items—which make up nearly three quarters of food expenditure—were effectively unchanged for the month.
The price index for food as a whole is up 0.3 percent over the past 12 months. The 0.3 percent increase reflects a 0.9 percent increase in the prices of less-processed items and a 0.1 percent increase in the prices of more-processed items.
Hotel and Motel Prices Reverse Course; Rents Up Sharply
After rising an annualized 1.4 percent in July—breaking a string of four straight monthly declines—prices for core goods fell by an annualized 1.5 percent in August.
Among core goods, the price indexes for women’s and girls’ clothing (down an annualized 6.4 percent) and clocks, lamps, lighting fixtures and other household decorative items (down an annualized 31.4 percent) had the biggest negative impacts on headline inflation, combining to subtract about a quarter of an annualized percentage point off August’s headline rate. At the other end of the spectrum, the price index for men’s and boys’ clothing rose at an annualized rate of 20.4 percent and added about 0.1 annualized percentage points to August’s headline inflation rate.
For the 12 months ending in August, prices for core goods are down 0.8 percent; they had been down 0.4 percent on a 12-month basis through July.
Prices for core services, meanwhile, rose at a 2.2 percent annualized rate in August. This follows a 1.1 percent annualized increase in July. As often happens with high-volatility items, August saw a reversal of June and July’s outsized declines in the price index for hotel and motel services; after falling by a combined 7 percent over the prior two months, the index rose 5.1 percent in August, contributing nearly half an annualized percentage point to August’s headline inflation rate.
Also notable among core services, the prices for health care services, taken as a whole, were unchanged in August, after having been essentially unchanged in July.
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 3.8 percent annualized rate in August, up from a 3.1 percent rate of increase in July. Individually, rent rose at a 4.8 percent annualized rate, OER rose at a 4.3 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 1.9 percent annualized rate. For rent, August’s rate of increase was the fastest since June 2008, and for OER, the fastest since October 2006.
For the 12 months through August, the big three index is up 3.2 percent, 0.1 percentage points higher than its increase for the 12 months through July. The price index for core services as a whole rose 2.0 percent for the 12 months ending in August, down 0.1 percentage points from the index’s 12-month increase through July.
—Jim Dolmas
September 29, 2017