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Behind the Numbers: PCE Inflation Update, June 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 1.2 percent at an annualized rate in June, following a 2.4 percent annualized increase a month earlier. An increase in the price index for food was largely offset by a decline in the price index for energy goods and services; food and energy together increased at a modest 0.7 percent annualized rate. The price index for PCE excluding food and energy rose at a 1.3 percent annualized rate, down from a 2.4 percent rate a month earlier. Prices of core goods fell while prices of core services rose.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.2 percent in June, identical to its rate of increase 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 2.1 percent.

The 12-month trimmed mean inflation rate was 1.9 percent in June, identical to its level in May. The 12-month inflation rate for headline PCE held steady at 2.2 percent, while the inflation rate for PCE excluding food and energy held steady at 1.9 percent.

Data in the June PCE release typically incorporate the results of the Bureau of Economic Analysis’ (BEA’s) annual update to the National Income and Product Accounts. About every five years or so, the BEA performs a comprehensive, or benchmark, update, making more substantive statistical and methodological changes, and revising data further back in time, than would be the case for a normal annual update. This year is just such a year. Data—including the underlying price and quantity data used to calculate the trimmed mean—were revised, in some cases all the way back to 1985. The bulk of the revisions affect data since around 2010. The largest price revisions among goods were to new and used motor vehicles and telephone equipment; among services, the largest price revisions were to some components of transportation services and financial services.

On average over the period containing the bulk of the revisions, the impacts on headline, core and trimmed mean inflation were modest. Where core inflation had averaged an annualized 1.59 percent from December 2009 to May 2018, the revised data show an average rate of 1.60 percent. The impact of the revised data on the trimmed mean was also a slight increase in its average rate over this period, from an annualized 1.65 percent to 1.67 percent. For the headline index, inflation averaged 1.52 percent over the period both before and after the revision.

Energy Prices Mixed, Down as a Whole

Prices for energy goods (gasoline and fuel oil) rose in June, while prices for energy services (electricity and natural gas services) declined. The price index for gasoline and other motor fuel rose a modest 0.6 percent for the month, while the price index for fuel oil rose 2.9 percent. Price indexes for electricity and natural gas services were down 1.4 percent and 1.7 percent, respectively. The price index for energy goods and services taken as a whole fell a scant 0.1 percent for the month.

The price index for gasoline is up 24.3 percent for the 12 months ending in June; it had been up 21.8 percent for the 12 months ending in May. Compared with June 2017, the price index for fuel oil is up 30.8 percent; over the same period, price indexes for electricity services and natural gas services are down 0.1 percent and 2.1 percent, respectively. The price index for energy goods and services as a whole is up 13.1 percent over the 12 months.

After a relatively modest increase in June, the price index for gasoline is likely to show a small decline when PCE data for July are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 1.4 percent decline in July, before seasonal adjustment. The typical seasonal pattern for July—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 0.8 percent decline, making the DOE data consistent with a roughly 0.6 percent seasonally adjusted decline. A price decline of that magnitude would have a negligible impact on July’s headline PCE inflation rate.

More-Processed Items Lead Food Prices Higher

After a sharp decline in May, the price index for food and beverages purchased for off-premises consumption reversed course in June, rising 2.1 percent at an annualized rate.

Underlying the increase in the aggregate was a 3.2 percent annualized increase in prices of more-processed food items, the fastest one-month rate of increase for that set of components in over two years. Prices for less-processed food items, meanwhile, were close to unchanged, falling a scant 0.4 percent at an annualized rate for the month.

The price index for food as a whole is up 0.6 percent over the past 12 months. The increase reflects a 0.9 percent increase in the prices of less-processed items and a 0.4 percent increase in the prices of more-processed items.

Core Goods Prices Drop

Following two consecutive increases, prices for core goods fell in June, declining 2.9 percent at an annualized rate.

Among core goods, the price indexes for women’s and girl’s clothing (down an annualized 15.5 percent) and jewelry (down an annualized 36.3 percent) had the largest negative impacts on headline inflation, each subtracting about 0.2 annualized percentage points off June’s headline rate. At the other end of the spectrum, the price index for prescription drugs (up an annualized 4.2 percent) had the largest positive impact on headline inflation, contributing 0.1 annualized percentage points to June’s headline rate.

For the 12 months ending in June, prices for core goods are down 0.5 percent; they had been down 0.2 percent for the 12 months ending in May.

Prices for core services, meanwhile, rose at a 2.7 percent annualized rate in June, following a 2.9 percent annualized increase in May. Among core services components, the price index for the final consumption expenditures of nonprofit institutions serving households (up an annualized 9.4 percent) had the biggest positive impact on all-items inflation, contributing roughly 0.3 annualized percentage points to June’s headline inflation rate. Among components experiencing outsized declines, the price index for hotels and motels (down an annualized 39.8 percent) had the largest negative impact, subtracting about 0.4 annualized percentage points from June’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 2.9 percent annualized rate in June, following a 3.3 percent annualized rate in May. Individually, rent rose at a 3.5 percent annualized rate and OER at a 3.1 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 2.2 percent annualized rate.

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

—Jim Dolmas
August 3, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update