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Behind the Numbers: PCE Inflation Update, November 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 2.8 percent annualized rate in November following a 1.8 percent increase in October. A sharp increase in gasoline prices accounted for much of the strength in the all-items inflation rate. Food prices fell in November after experiencing little or no change the prior three months. The price index for PCE excluding food and energy rose at a 0.9 percent annualized rate following a 2.5 percent annualized increase in October. Prices for core goods fell sharply, and prices for core services rose at a 2.5 percent annualized rate.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.2 percent in November, up from annualized rates of 1.9 percent and 1.8 percent in September and October, respectively.

The 12-month trimmed mean inflation rate rose to 1.7 percent from 1.6 percent in October; the rate had been at 1.6 percent since July. The 12-month headline inflation rate increased to 1.8 percent from 1.6 percent in October, and the 12-month inflation rate for PCE excluding food and energy increased to 1.5 percent from 1.4 percent.

Gasoline Prices Surge in November

The price index for gasoline and other motor fuel rose 7.2 percent in November, a bit more than the 6.6 percent increase we predicted in last month’s update. Gasoline alone contributed about 1.8 annualized percentage points to November’s headline inflation rate, in the sense that an index of all items apart from gasoline would have risen at a 1.0 percent annualized rate.

Among other energy goods and services, price indexes rose 5.0 percent for fuel oil, 0.6 percent for natural gas services and 0.5 percent for electricity services. The price index for energy goods and services taken as a whole rose 4.3 percent for the month.

The price index for gasoline is up 16.5 percent for the 12 months ending in November; it had been up 10.8 percent for the 12 months ending in October. Compared with November 2016, price indexes are up 18.6 percent for fuel oil, 3.6 percent for natural gas services and 2.5 percent for electricity services, which is typically much less volatile than other energy components. Over the same period, the price index for energy goods and services as a whole is up 10.4 percent.

Some of the increase in the gasoline price index is apt to be reversed when PCE data for December are released.

Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 3.4 percent decline in December. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for December—what we would expect given normal changes in supply-and-demand conditions—amounts to roughly a 0.6 percent decline, making the DOE data consistent with a 2.8 percent seasonally adjusted decline. A decrease of that size would subtract about 0.7 annualized percentage points from December’s headline PCE inflation rate.

Food Prices Fall After Three Flat Months

After being close to unchanged in each of the prior three months, food prices fell an annualized 1.4 percent in November.

Underlying the decline in the aggregate was a sharp drop in prices of less-processed food items, which fell at a 5.0 percent annualized rate for the month. Prices for more-processed items—which make up nearly three quarters of food expenditures—were essentially unchanged from October, declining less than 0.05 percent at an annualized rate.

The price index for food as a whole is up 0.6 percent over the past 12 months. The change reflects a 1.4 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 Decline, Services Prices Rise

Prices for core goods fell at a 3.4 percent annualized rate in November following an annualized decline of just 0.1 percent in October.

Among core goods, the price indexes for household linens (down an annualized 42.3 percent), women’s and girls’ clothing (down an annualized 20.1 percent) and men’s and boys’ clothing (down an annualized 15.7 percent) had the biggest negative impacts on headline inflation, combining to subtract about 0.7 annualized percentage points off November’s headline rate. The three categories together also account for almost the entire decline in the index of core goods prices. At the other end of the spectrum, the price index for prescription drugs rose at an annualized rate of 7.6 percent and added a little less than 0.2 annualized percentage points to November’s headline inflation rate.

For the 12 months ending in November, prices for core goods are down 0.7 percent; they had been down 0.8 percent on a 12-month basis through October.

Prices for core services, meanwhile, rose at a 2.5 percent annualized rate in November following a 3.5 percent annualized increase in October. Among core services components, the price index for the nonfee services of “other depository institutions and regulated investment companies” had the biggest negative impact on all-items inflation, decreasing at a 16.9 percent annualized rate and subtracting a bit more than 0.3 annualized percentage points from November’s headline inflation rate. The price index for financial service charges, fees and commissions had the largest positive impact, increasing at an 18.6 percent annualized rate and contributing about 0.3 annualized percentage points to November’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 3.0 percent annualized rate in November, down from a 3.5 percent rate of increase in October. Individually, rent rose at a 4.0 percent annualized rate and OER at a 3.0 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 2.2 percent annualized rate.

For the 12 months through November, the big three index is up 3.1 percent, which is identical to its increase for the 12 months through October. The price index for core services as a whole rose 2.3 percent for the 12 months ending in November, compared with a 2.2 percent increase for the 12 months through October.

—Jim Dolmas
December 22, 2017

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update