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Behind the Numbers: PCE Inflation Update, December 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 1.3 percent annualized rate in December, as a sharp decline in gasoline prices weighed on the headline index. Food prices were close to unchanged in December, as they had been in three of the four prior months. The price index for PCE excluding food and energy rose at a 2.1 percent annualized rate following a 1.1 percent annualized increase in November. Prices for core goods were unchanged, and prices for core services rose at a 2.9 percent annualized rate.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.8 percent in December, following an annualized rate of 2.1 percent a month earlier.

The 12-month trimmed mean inflation rate held steady at 1.7 percent in December. The 12-month headline inflation rate ticked down to 1.7 percent from 1.8 percent, and the 12-month inflation rate for PCE excluding food and energy held steady at 1.5 percent.

Gasoline Down, Other Energy Components Up

The price index for gasoline and other motor fuel fell 2.7 percent in December, partly reversing a 7.2 percent increase in November. Gasoline alone subtracted about 0.8 annualized percentage points from December’s headline inflation rate, in the sense that an index of all items apart from gasoline would have risen at a 2.1 percent annualized rate.

Among other energy goods and services, price indexes rose 3.0 percent for fuel oil, 1.2 percent for natural gas services and 0.1 percent for electricity services. Reflecting gasoline’s large expenditure share relative to the other major energy components, the price index for energy goods and services taken as a whole fell 1.2 percent for the month.

The price index for gasoline is up 10.7 percent for the 12 months ending in December; it had been up 16.5 percent for the 12 months ending in November. Compared with December 2016, price indexes are up 15.2 percent for fuel oil, 4.7 percent for natural gas services and 2.6 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 7.4 percent.

December’s decrease in the gasoline price index is apt to be reversed—and then some—when PCE data for January are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for roughly a 2.5 percent increase in January. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for January—what we would expect given normal changes in supply-and-demand conditions—amounts to roughly a 2.3 percent decline, making the DOE data consistent with a 4.8 percent seasonally adjusted increase. An increase of that size would add about 1.2 annualized percentage points to January’s headline PCE inflation rate.

Food Prices Nearly Unchanged

After falling at an annualized 1.4 percent rate in November, prices for food taken as a whole were close to unchanged in December, rising less than 0.1 percent at a monthly rate. November’s decline snapped a string of three straight flat readings, so food prices changed little in four of the final five months of 2017.

Underlying the negligible change in the aggregate was a sharp increase in prices of less-processed food items, offset by a substantial decline in prices for more-processed items. Prices for less-processed food items rose at an 8.9 percent annualized rate for the month, while prices for more-processed items—which make up nearly three-quarters of food expenditures—fell at a 2.2 percent annualized rate.

The price index for food as a whole is up 0.8 percent over the past 12 months. The change reflects a 2.7 percent increase in the prices of less-processed items and a 0.1 percent increase in the prices of more-processed items.

Core Goods Flat, Services Up Solidly

Prices for core goods were effectively unchanged in December—their annualized change was just –0.01 percent—following a 3.5 percent annualized decline in November.

Among core goods, the price indexes for women’s and girls’ clothing (down an annualized 6.7 percent), audio equipment (down an annualized 48.5 percent) and nonelectric cookware and tableware (down an annualized 30.4 percent) had the biggest negative impacts on headline inflation, combining to subtract about 0.3 annualized percentage points off December’s headline rate. At the other end of the spectrum, the price index for prescription drugs rose at an annualized rate of 13.1 percent and added a little less than 0.4 annualized percentage points to December’s headline inflation rate.

For the 12 months ending in December, prices for core goods are down 0.8 percent, identical to their 12-month change through November.

Prices for core services, meanwhile, rose at a 2.9 percent annualized rate in December, following a 2.7 percent annualized increase in November. Among core services components, the price index for air transportation had the biggest negative impact on all-items inflation, decreasing at a 54.3 percent annualized rate and subtracting a bit less than 0.4 annualized percentage points from December’s headline inflation rate. The price indexes for the nonfee services of “other depository institutions and regulated investment companies” (up at a 26.0 percent annualized rate) and financial service charges, fees and commissions (up at a 10.9 percent annualized rate) had the largest positive impacts, combining to contribute about 0.5 annualized percentage points to December’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 3.7 percent annualized rate in December, up from a 3.0 percent rate of increase in November. Individually, rent rose at a 4.4 percent annualized rate and OER at a 4.2 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.9 percent annualized rate.

For the 12 months through December, the big three index is up 3.1 percent, which is identical to its increase for the 12 months through November. The price index for core services as a whole rose 2.3 percent for the 12 months ending in December. Over the last four months of the year, the core services index rose at a 3.1 percent annualized rate, compared with a 1.9 percent rate over the first eight months.

—Jim Dolmas
February 2, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update