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Behind the Numbers: PCE Inflation Update, February 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 2.3 percent annualized rate in February. The price index for PCE excluding food and energy rose at a 2.8 percent annualized rate following a 3.5 percent annualized increase in January. Prices for core goods were essentially unchanged, while prices for core services rose at a 3.8 percent annualized rate. Price indexes for food and energy were both down for the month.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.7 percent in February, following an annualized 2.8 percent a month earlier. Over the last six months, the trimmed mean has averaged an annualized 2.0 percent rate of increase. Over the same period, the headline index and the index excluding food and energy have averaged annualized rates of increase of 3.0 percent and 2.3 percent, respectively.

The 12-month trimmed mean inflation rate held steady at 1.7 percent in February, marking a fourth consecutive month at that level. Twelve-month inflation rates for headline PCE and for PCE excluding food and energy each ticked up 0.1 percentage points; the headline inflation rate rose to 1.8 percent, and the core rate rose to 1.6 percent.

Energy Prices Mixed

Prices for energy goods and services fell slightly in February as price declines for energy goods—gasoline and fuel oil—were largely offset by price increases for energy services—electricity and, especially, natural gas.

The price index for gasoline and other motor fuel fell 0.8 percent, and the price index for fuel oil fell 3.6 percent, while the price indexes for natural gas services and electricity services rose 4.7 percent and 0.4 percent, respectively. Given these countervailing movements, the price index for energy goods and services taken as a whole fell a slight 0.1 percent for the month.

The price index for gasoline is up 10.7 percent for the 12 months ending in February; it had been up 8.4 percent for the 12 months ending in January. Compared with February 2017, price indexes are up 15.4 percent for fuel oil, 3.6 percent for natural gas services and 2.0 percent for electricity services. Over the same period, the price index for energy goods and services as a whole is up 7.2 percent.

February’s modest decline in the price index for gasoline is likely to be followed by a more substantial decline when PCE data for March are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for just a 0.1 percent increase in March, before seasonal adjustment. The typical seasonal pattern for March—what we would expect given normal changes in supply-and-demand conditions—amounts to roughly a 4.8 percent increase, making the DOE data consistent with a 4.7 percent seasonally adjusted decline. A decline of that magnitude would subtract about 1.1 annualized percentage points off March’s headline PCE inflation rate.

Food Prices Fall

The price index for food and beverages purchased for off-premises consumption fell an annualized 1.6 percent in February; this follows an annualized increase of 0.6 percent a month earlier.

Underlying the decline in the aggregate were declines in prices of both less-processed and more-processed food items. Prices for less-processed food items declined at a 3.4 percent annualized rate for the month, while prices for more-processed items—which make up nearly three-quarters of food expenditures—declined at a 1.0 percent annualized rate.

The price index for food as a whole is up 0.6 percent over the past 12 months. The increase reflects a 2.1 percent increase in the prices of less-processed items and a 0.1 percent increase in the prices of more-processed items.

Core Goods Prices Flat, Services Up Sharply

Prices for core goods were essentially unchanged in February, falling a scant 0.1 percent at an annualized rate. This follows a robust 4.3 percent annualized increase in January.

Among core goods, the price index for prescription drugs (down an annualized 5.1 percent) had the largest negative impact on headline inflation, while the price index for women’s and girls’ clothing (up an annualized 20.1 percent) had the largest positive impact. The contributions to February’s headline inflation rate from the two extreme price movements were both about a quarter of an annualized percentage point in absolute size but in opposite directions.

For the 12 months ending in February, prices for core goods are down 1.1 percent; they had been down 1.0 percent for the 12 months ending in January.

Prices for core services, meanwhile, rose at a 3.8 percent annualized rate in January, following a 3.3 percent annualized increase in January and 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 5.4 percent annualized rate and subtracting roughly 0.2 annualized percentage points from February’s headline inflation rate. As was the case a month earlier, the price index for nonprofit hospital services (up an annualized 11.1 percent) had the largest positive impact, contributing about 0.5 annualized percentage points to February’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 2.6 percent annualized rate in February, its slowest rate of increase in nearly a year. This follows a 3.8 percent rate of increase in January. Individually, rent rose at a 2.5 percent annualized rate and OER at a 2.4 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 3.3 percent annualized rate.

For the 12 months through February, the big three index is up 3.1 percent, which is identical to its increase for the 12 months through January. The price index for core services as a whole rose 2.5 percent for the 12 months ending in February, up from 2.4 percent for the 12 months ending in January. Core services’ 12-month inflation rate stood at 2.0 percent in August 2017; over the subsequent six months, prices for core services have averaged an annualized 3.3 percent rate of increase.

—Jim Dolmas
March 1, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update