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Behind the Numbers: PCE Inflation Update, October 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 1.7 percent annualized rate in October, following a 4.9 percent increase in September. After two sharp monthly increases, gasoline prices fell in October, holding down the all-items inflation rate. Food prices, as a whole, were close to unchanged for a third straight month. The price index for PCE excluding food and energy rose at a 2.5 percent annualized rate, its fastest one-month rate of increase since January. Prices for core goods were essentially unchanged from September, and prices for core services rose at a 3.4 percent annualized rate.

The Dallas Fed’s trimmed mean PCE inflation rate was an annualized 1.7 percent in October, following a 1.9 percent annualized rate in September and an average 1.4 percent annualized rate over the six months prior to September.

The 12-month trimmed mean inflation rate held steady at 1.6 percent for a fourth month. The 12-month headline inflation rate was also 1.6 percent, a tick down from a revised 1.7 percent in September. The 12-month inflation rate for PCE excluding food and energy was unchanged at 1.4 percent.

Gasoline Prices Fall in October

The price index for gasoline and other motor fuel fell 2.5 percent in October, after recording increases of 13.0 percent in September and 6.3 percent in August. Gasoline alone subtracted about 0.7 annualized percentage points from October’s headline inflation rate, in the sense that an index of all items apart from gasoline would have risen at a 2.4 percent annualized rate, rather than the 1.7 percent rate posted by the all-items index.

Among other energy goods and services, the price index for fuel oil rose 2.3 percent, the price index for natural gas services rose 0.3 percent, and the price index for electricity services rose 0.5 percent. Reflecting gasoline’s large expenditure share, the price index for energy goods and services taken as a whole fell 1.1 percent for the month, in spite of increases in three out of four major energy components.

The price index for gasoline is up 10.8 percent for the 12 months ending in October; it had been up 19.2 percent for the 12 months ending in September. Compared with October 2016, the price index for fuel oil is up 11.7 percent, the price index for natural gas services is up 3.2 percent, and the price index for electricity services—typically much less volatile than other energy components—is up 2.0 percent. Over the same period, the price index for energy goods and services as a whole is up 6.9 percent.

The decline in gasoline prices looks to be short lived. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 2.2 percent increase in November. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for November—what we would expect given normal changes in supply and demand conditions—is roughly a 4.4 percent decline, making the DOE data consistent with a 6.6 percent seasonally adjusted increase. An increase of that size—similar to August’s—would add about 1.6 annualized percentage points to November’s headline PCE inflation rate.

Food Prices Close to Flat for Third Month

Food prices were close to unchanged in October, rising less than 0.05 percent at a monthly rate, or less than 0.6 percent at an annualized rate. This follows even smaller changes in August and September.

As was the case in September, underlying the unchanged aggregate were offsetting movements in the prices of less-processed and more-processed food items. Prices for less-processed food items rose at a 4.7 percent annualized rate, while prices for more-processed items—which make up nearly three quarters of food expenditures—fell at a 0.9 percent annualized rate. This is the opposite pattern from a month earlier, when an increase in the prices of more-processed items offset a decline in the prices of less-processed items.

The price index for food as a whole is up 0.5 percent over the past 12 months. The 0.5 percent increase reflects a 1.4 percent increase in the prices of less-processed items and a 0.2 percent increase in the prices of more-processed items.

Core Goods Prices Flat, Services Prices Up Solidly

Prices for core goods were effectively unchanged in October, falling by less than 0.01 percent at a monthly rate. This follows two months during which core goods prices averaged a 1.9 percent annualized rate of decline.

Among core goods, the price indexes for newspapers and periodicals (down an annualized 33.7 percent) and prescription drugs (down an annualized 2.9 percent) had the biggest negative impacts on headline inflation, combining to subtract about 0.4 annualized percentage points off October’s headline rate. The price decline for newspapers and periodicals—3.4 percent before annualization—was the largest one-month decline for that component in data going back to 1959. At the other end of the spectrum, the price index for tobacco products rose at an annualized rate of 20.8 percent and added a little more than 0.1 annualized percentage points to October’s headline inflation rate.

For the 12 months ending in October, prices for core goods are down 0.8 percent; they had been down 1.0 percent on a 12-month basis through September.

Prices for core services, meanwhile, rose at a solid 3.4 percent annualized rate in October, a pace well above their recent average rate of increase and one exceeded in only a handful of months over the past several years. This follows a 3.2 percent annualized increase in September. Among core services components, the price index for the nonfee services of “other depository institutions and regulated investment companies” had the biggest impact on all-items inflation, increasing at a 27.6 percent annualized rate and contributing about 0.4 annualized percentage points to October’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 3.5 percent annualized rate in October, up from a 2.9 percent rate of increase in September. Individually, rent rose at a 3.3 percent annualized rate, OER rose at a 3.9 percent annualized rate, and dining out (more formally, “other purchased meals”) rose at a 2.5 percent annualized rate.

For the 12 months through October, the big three index is up 3.1 percent, identical to its increase for the 12 months through September. The price index for core services as a whole rose 2.2 percent for the 12 months ending in October, also identical to the index’s 12-month increase through September.

—Jim Dolmas
November 30, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update