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Behind the Numbers: PCE Inflation Update, January 2018

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 4.5 percent annualized rate in January. The price index for energy goods and services—driven primarily by a jump in gasoline prices—rose sharply for the month; food prices rose slightly. The price index for PCE excluding food and energy rose at a 3.3 percent annualized rate following a 2.0 percent annualized increase in December. Prices for core goods were up sharply, rising at a 4.2 percent annualized rate, while prices for core services rose at a 3.0 percent annualized rate.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.7 percent in January, following an annualized rate of 2.1 percent a month earlier. Over the last six months, the trimmed mean has averaged an annualized 2.0 percent rate of increase, as has the index excluding food and energy. The headline PCE price index has averaged an annualized 3.0 percent rate of increase over that period.

The 12-month trimmed mean inflation rate held steady at 1.7 percent in January. Twelve-month inflation rates for headline PCE and for PCE excluding food and energy were also unchanged from a month earlier, at 1.7 percent and 1.5 percent, respectively.

Gasoline Prices Up Sharply

The price index for gasoline and other motor fuel rose 5.6 percent in January, a bit higher than our expectation in last month’s Inflation Update. Gasoline alone contributed about 1.4 annualized percentage points to January’s headline inflation rate, in the sense that an index of all items apart from gasoline would have risen at a 3.1 percent annualized rate.

Among other energy goods and services, the price index for fuel oil rose 9.5 percent, while the price indexes for natural gas services and electricity services declined 2.6 percent and 0.2 percent, respectively. The price index for energy goods and services taken as a whole rose 3.0 percent for the month.

The price index for gasoline is up 8.4 percent for the 12 months ending in January; it had been up 10.7 percent for the 12 months ending in December. Compared with January 2017, price indexes are up 19.2 percent for fuel oil, 0.5 percent for natural gas services and 2.4 percent for electricity services. Over the same period, the price index for energy goods and services as a whole is up 5.9 percent.

Part of January’s increase in the gasoline price index is apt to be reversed when PCE data for February are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for roughly a 1.3 percent increase in February. Those DOE data are not seasonally adjusted, however. The typical seasonal pattern for February—what we would expect given normal changes in supply-and-demand conditions—amounts to roughly a 2.5 percent increase, making the DOE data consistent with a 1.2 percent seasonally adjusted decline. A decline of that magnitude would be a relatively minor price movement for gasoline, with only a slight impact of about –0.3 annualized percentage points on February’s headline PCE inflation rate.

Food Prices Up Slightly

The price index for food and beverages purchased for off-premises consumption rose an annualized 0.6 percent in January; this follows an annualized increase of 1.0 percent in December.

Underlying the small increase in the aggregate was a decline in prices of less-processed food items that was more than offset by an increase in prices for more-processed items. Prices for less-processed food items declined at a 2.6 percent annualized rate for the month, while prices for more-processed items—which make up nearly three-quarters of food expenditures—rose at a 1.9 percent annualized rate.

The price index for food as a whole is up 0.9 percent over the past 12 months. The increase reflects a 2.9 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 Rise Sharply

Prices for core goods rose at a 4.2 percent annualized rate in January, their fastest one-month rate of increase since the 6.8 percent annualized rise in January 2017.

Among core goods, the price indexes for women’s and girls’ clothing (up an annualized 39.4 percent) and household linens (up an annualized 93.0 percent) had the largest positive impacts on headline inflation, combining to contribute about 0.6 annualized percentage points to January’s headline rate. At the other end of the spectrum, the price index for prescription drugs declined at an annualized rate of 1.8 percent and subtracted a little more than 0.2 annualized percentage points from January’s headline inflation rate.

For the 12 months ending in January, prices for core goods are down 1.0 percent; they had been down 0.8 percent for the 12 months ending in December.

Prices for core services, meanwhile, rose at a 3.0 percent annualized rate in January, following a 2.8 percent annualized increase in December. Among core services components, the price index for the consumption expenditures of nonprofit institutions serving households had the biggest negative impact on all-items inflation, decreasing at a 11.0 percent annualized rate and subtracting roughly 0.5 annualized percentage points from January’s headline inflation rate. The price index for nonprofit hospital services (up at a 14.5 percent annualized rate) had the largest positive impact, contributing about 0.5 annualized percentage points to January’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 3.8 percent annualized rate in January, up from a 3.4 percent rate of increase in December. Individually, rent rose at a 4.1 percent annualized rate and OER at a 3.4 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 4.4 percent annualized rate.

For the 12 months through January, the big three index is up 3.1 percent, which is identical to its increase for the 12 months through December. The price index for core services as a whole rose 2.4 percent for the 12 months ending in January, up from 2.3 percent for the 12 months ending in December.

—Jim Dolmas
March 1, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update