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Behind the Numbers: PCE Inflation Update, September 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 4.6 percent annualized rate in September, following a 2.5 percent increase in August. As was the case in August, sharply higher gasoline prices contributed to September’s robust headline rate. Food prices, as a whole, were close to unchanged for a second straight month. The price index for PCE excluding food and energy rose at a 1.6 percent annualized rate, with prices for core goods falling at a 2.3 percent annualized rate, and prices for core services rising at a 2.9 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.8 percent in September, following a 1.6 percent annualized rate in August and an average 1.4 percent annualized rate over May–July.

The 12-month trimmed mean inflation rate held steady at 1.6 percent for a third month. The 12-month headline inflation rate increased to 1.6 percent from 1.4 percent, while the 12-month inflation rate for PCE excluding food and energy was unchanged at 1.3 percent.

Gasoline Prices Jump in September

The price index for gasoline and other motor fuel rose 13.0 percent in September, likely reflecting the disruptions to refining activity that resulted from Hurricane Harvey. Gasoline alone contributed roughly 3.1 annualized percentage points to September’s headline inflation rate, in the sense that an index of all items apart from gasoline would have risen at just a 1.5 percent annualized rate, rather than the 4.6 percent rate posted by the all-items index.

Among other energy goods and services, the price index for fuel oil rose 8.2 percent, and the price index for natural gas services fell 0.8 percent, while the price index for electricity services was unchanged. The price index for energy goods and services taken as a whole rose 6.8 percent for the month, its sharpest one-month increase since June 2009.

The price index for gasoline is up 19.2 percent for the 12 months ending in September; it had been up 10.3 percent for the 12 months ending in August. Compared with September 2016, the price index for fuel oil is up 15.6 percent, the price index for natural gas services is up 3.8 percent, and the price index for electricity services—typically much less volatile than other energy components—is up 1.7 percent. Over the same period, the price index for energy goods and services as a whole is up 11.1 percent.

With Hurricane Harvey’s disruptions to refining activity having passed, gasoline prices have begun to decline. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 4.9 percent decline in October. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for October—what we would expect given normal changes in supply and demand conditions—is roughly a 3.1 percent decline, making the DOE data consistent with a 1.8 percent seasonally adjusted decline. A decline of that size—modest, given gasoline’s typical volatility—would subtract about 0.4 annualized percentage points from October’s headline rate.

Food Prices Flat for a Second Month

Food prices were close to unchanged in September (their annualized rate of change was just 0.1 percent), after recording a negligible change in August. Underlying the unchanged aggregate were offsetting movements in the prices of less-processed and more-processed food items. Prices for less-processed food items declined at a 2.9 percent annualized rate, while prices for more-processed items—which make up nearly three quarters of food expenditures—rose at a 1.2 percent annualized rate.

The price index for food as a whole is up 0.4 percent over the past 12 months. The 0.4 percent increase reflects a 0.7 percent increase in the prices of less-processed items and a 0.3 percent increase in the prices of more-processed items.

Core Goods Prices Post Sharp Decline

Prices for core goods fell by an annualized 2.3 percent in September. This follows a 1.5 percent annualized decline in August.

Among core goods, the price indexes for prescription drugs (down an annualized 7.1 percent) and women’s and girls’ clothing (down an annualized 11.0 percent) had the biggest negative impacts on headline inflation, combining to subtract about 0.6 annualized percentage points off September’s headline rate. At the other end of the spectrum, the price index for infants’ and children’s clothing—one of the most volatile components of core goods—rose at an annualized rate in excess of 100 percent and added about 0.1 annualized percentage points to September’s headline inflation rate.

For the 12 months ending in September, prices for core goods are down 1.0 percent; they had been down 0.8 percent on a 12-month basis through August. At 1.0 percent, the 12-month decline in the core goods price index is the largest since September 2007.

Prices for core services, meanwhile, rose at a 2.9 percent annualized rate in September, well above their recent average rate of increase. This follows a 2.2 percent annualized increase in August. The price indexes for air transportation services and hotels and motels posted notable increases, the former rising at a 45.1 percent annualized rate and the latter rising at a 22.0 percent annualized rate. The two components combined to contribute about 0.3 annualized percentage points to September’s headline inflation rate. Also, after two months of negligible change, the price index for health care services increased at a 2.2 percent annualized 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 2.9 percent annualized rate in September, down from a 3.8 percent rate of increase in August. Slower growth in the rent components accounted for the deceleration. Individually, rent rose at a 2.5 percent annualized rate, OER rose at a 3.0 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 3.2 percent annualized rate. In August, both rent components increased at annualized rates in excess of 4 percent.

For the 12 months through September, the big three index is up 3.1 percent, 0.1 percentage points less than its increase for the 12 months through August. The price index for core services as a whole rose 2.1 percent for the 12 months ending in September, up 0.1 percentage points from the index’s 12-month increase through August.

—Jim Dolmas
November 3, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update