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Behind the Numbers: PCE Inflation Update, May 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 2.6 percent at an annualized rate in May, following a 2.9 percent annualized increase a month earlier. A sharp jump in the price index for energy goods and services was partly offset by a decline in the price index for food; food and energy together increased at a rate similar to the overall basket. The price index for PCE excluding food and energy also rose at a 2.6 percent annualized rate, up from a 2.1 percent rate a month earlier. Prices for core goods and core services both rose for the month.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.3 percent in May, following an annualized 2.0 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 both averaged annualized rates of increase of 2.3 percent.

The 12-month trimmed mean inflation rate was 1.8 percent in May, identical to its revised level in April (though up from the initial April estimate of 1.7 percent). The 12-month inflation rate for headline PCE increased to 2.3 percent from 2.0 percent in April, while the inflation rate for PCE excluding food and energy rose to 2.0 percent from 1.8 percent in April.

Gasoline Price Jump Lifts Energy Index

Prices for energy goods and services taken as a whole rose in May, driven by a 1.7 percent increase in their largest component, the price index for gasoline and other motor fuel. May’s increase in gasoline prices, which follows a 3.0 percent increase in April, contributed roughly 0.4 annualized percentage points to May’s headline inflation rate.

Other major energy components were mixed, with the price indexes for fuel oil and natural gas services declining 0.7 percent and 0.6 percent, respectively, while the price index for electricity services rose 0.1 percent. The price index for energy goods and services taken as a whole rose 0.9 percent for the month.

The price index for gasoline is up 24.2 percent for the 12 months ending in May; it had been up 14.2 percent for the 12 months ending in April. Compared with May 2017, price indexes are up 21.5 percent for fuel oil and 0.7 percent for electricity services, while the price index for natural gas services is down 1.9 percent. Over the same period, the price index for energy goods and services as a whole is up 12.8 percent.

After two straight months of substantial increases, the price index for gasoline is likely to show a small decline when PCE data for June are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for just under a 0.6 percent decline in June, before seasonal adjustment. The typical seasonal pattern for June—what we would expect given normal changes in supply-and-demand conditions—amounts to a bit more than a 0.2 percent decline, making the DOE data consistent with a roughly 0.3 percent seasonally adjusted decline. That’s a relatively small movement for gasoline prices; over the past 25 years, only 22 months have seen smaller absolute price changes. A price decline of that magnitude would have a negligible impact on June’s headline PCE inflation rate.

Food Prices Tumble

Following two months of solid increases, the price index for food and beverages purchased for off-premises consumption fell in May by an annualized 2.5 percent.

Underlying the increase in the aggregate were declines in prices of both less-processed and more-processed food items. Prices for less-processed food items fell at a 5.0 percent annualized rate for the month, while prices for more-processed items—which make up nearly three-quarters of food expenditures—fell at a 1.5 percent annualized rate.

The price index for food as a whole is up 0.3 percent over the past 12 months. The increase reflects a 1.1 percent increase in the prices of less-processed items and a negligible decline in the prices of more-processed items.

Core Goods Prices Up Again

Prices for core goods recorded another solid increase in May, rising 1.1 percent at an annualized rate, identical to their rate of increase in April.

Among core goods, the price index for prescription drugs (up an annualized 18.2 percent) had the largest positive impact on headline inflation, contributing about half an annualized percentage point to May’s headline rate. At the other end of the spectrum, the price index for games, toys and hobbies (down an annualized 22.0 percent) had the largest negative impact on headline inflation, subtracting a bit less than 0.2 annualized percentage points off May’s headline rate.

For the 12 months ending in May, prices for core goods are down just 0.2 percent; they had been down 0.6 percent for the 12 months ending in April.

Prices for core services, meanwhile, rose at a 3.1 percent annualized rate in May, following a 2.4 percent annualized increase in April. Among core services components, the price index for the final consumption expenditures of nonprofit institutions serving households (up an annualized 13.7 percent) had the biggest positive impact on all-items inflation, contributing roughly 0.3 annualized percentage points to May’s headline inflation rate. Among components experiencing outsized declines, the price index for dental services (down an annualized 5.5 percent) had the largest negative impact, subtracting about 0.1 annualized percentage points from May’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 3.3 percent annualized rate in May, following a 3.7 percent rate in April. Individually, rent rose at a 3.2 percent annualized rate and OER at a 3.1 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 4.1 percent annualized rate.

For the 12 months through May, the big three index is up 3.3 percent, 0.1 percentage points higher than its increase for the 12 months through April. The price index for core services as a whole rose 2.7 percent for the 12 months ending in May, identical to its increase for the 12 months ending in April.

—Jim Dolmas
June 29, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update