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Behind the Numbers: PCE Inflation Update, March 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 was essentially unchanged in March, weighed down by declines in the prices of energy goods and services, particularly gasoline. The price index for PCE excluding food and energy rose at a 1.8 percent annualized rate following a 2.5 percent annualized increase in February. Prices for core goods fell sharply, while prices for core services rose at a 3.4 percent annualized rate. The price index for food rose at a 2.1 percent annualized rate.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.5 percent in March, following an annualized 1.7 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 2.2 percent and 2.3 percent, respectively.

The 12-month trimmed mean inflation rate ticked up to 1.8 percent in March, following four months at 1.7 percent. The 12-month inflation rate for headline PCE rose to 2.0 percent from 1.7 percent in February, while the 12-month inflation rate for PCE excluding food and energy rose to 1.9 percent from 1.6 percent.

Gasoline Prices Down Sharply

Prices for energy goods and services fell in March, led by a 4.9 percent decline in the price index for gasoline (and other motor fuel). The gasoline component alone subtracted roughly 1.4 annualized percentage points off March’s headline inflation rate.

Among the other major energy components, the price index for fuel oil fell 0.7 percent, while the price index for natural gas services fell 1.2 percent; the price index for electricity services was effectively unchanged. Reflecting gasoline’s outsized weight among energy components, the price index for energy goods and services taken as a whole fell 2.8 percent for the month.

The price index for gasoline is up 12.2 percent for the 12 months ending in March; it had been up 10.7 percent for the 12 months ending in February. Compared with March 2017, price indexes are up 15.4 percent for fuel oil, 3.3 percent for natural gas services and 2.2 percent for electricity services. Over the same period, the price index for energy goods and services as a whole is up 7.9 percent.

After March’s substantial decline, the price index for gasoline is likely to show a modest rebound when PCE data for April are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 5.4 percent increase in April, before seasonal adjustment. The typical seasonal pattern for April—what we would expect given normal changes in supply-and-demand conditions—amounts to roughly a 3.1 percent increase, making the DOE data consistent with a 2.3 percent seasonally adjusted increase. Given gasoline’s weight in the PCE basket, a price increase of that magnitude would contribute about 0.6 annualized percentage points to April’s headline PCE inflation rate.

Food Prices Rise

The price index for food and beverages purchased for off-premises consumption rose an annualized 2.1 percent in March; this follows an annualized decline of 1.6 percent a month earlier.

Underlying the increase in the aggregate were increases in prices of both less-processed and more-processed food items. Prices for less-processed food items rose at a 1.0 percent annualized rate for the month, while prices for more-processed items—which make up nearly three-quarters of food expenditures—rose at a 2.5 percent annualized rate.

The price index for food as a whole is up 0.4 percent over the past 12 months. The increase reflects a 1.5 percent increase in the prices of less-processed items and a less-than-0.1 percent increase in the prices of more-processed items.

Core Goods Prices Down; Services Prices Post Another Solid Increase

Prices for core goods declined sharply in March, falling 2.5 percent at an annualized rate. This follows a negligible decline in February and a robust 4.3 percent annualized increase in January.

Among core goods, the price index for women’s and girls’ clothing (down an annualized 22.9 percent) had the largest negative impact on headline inflation, subtracting about 0.4 annualized percentage points off March’s headline rate. Prices for furniture, used vehicles, and men’s and boys’ clothing also had outsized declines. At the other end of the spectrum, the price index for newspapers and periodicals (up an annualized 53.0 percent) had the largest positive impact on headline inflation, contributing about 0.2 annualized percentage points to March’s headline rate. For the newspapers and periodicals price index, the March increase was the sharpest one-month jump since mid-1974.

For the 12 months ending in March, prices for core goods are down 0.9 percent; they had been down 1.1 percent for the 12 months ending in February.

Prices for core services, meanwhile, rose at a 3.4 percent annualized rate in February, following 3.3 percent annualized increases in both January and February. Among core services components, the price index for communication services (down an annualized 4.7 percent) had the biggest negative impact on all-items inflation, subtracting roughly 0.1 annualized percentage points from March’s headline inflation rate. The price index for financial service charges, fees and commissions (up an annualized 26.6 percent) had the largest positive impact, contributing about 0.5 annualized percentage points to March’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 3.2 percent annualized rate in March, up from a 2.6 percent rate in February. Individually, rent rose at a 3.1 percent annualized rate and OER at a 3.8 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.5 percent annualized rate.

For the 12 months through March, the big three index is up 3.2 percent, 0.1 percentage points higher than its increase for the 12 months through February. The price index for core services as a whole rose 2.9 percent for the 12 months ending in March, up from 2.5 percent for the 12 months ending in February. March’s 2.9 percent 12-month inflation rate is the highest for core services since August 2008.

—Jim Dolmas
May 4, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update