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Behind the Numbers: PCE Inflation Update, July 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 1.5 percent at an annualized rate in July, following a 1.4 percent annualized increase a month earlier. An increase in the price index for food partly offset a decline in the price index for energy goods and services; food and energy together declined at a 1.5 percent annualized rate. The price index for PCE excluding food and energy rose at a 1.9 percent annualized rate, up from a 1.5 percent rate a month earlier. Price indexes for core goods and core services both rose.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.6 percent in July, down from an annualized 2.4 percent rate of increase a month earlier. Trimmed mean rates for both May and June were revised up noticeably—in both cases, earlier estimates of a 2.0 percent annualized rate were revised up to 2.4 percent.

Over the last six months, the trimmed mean has averaged an annualized 1.9 percent rate of increase. Over the same period, the headline index averaged an annualized rate of 1.7 percent while the index excluding food and energy averaged an annualized rate of increase of 2.0 percent.

The 12-month trimmed mean inflation rate was 2.0 percent in July, identical to its upwardly revised level in June. The 12-month inflation rate for headline PCE ticked up to 2.3 percent from 2.2 percent in June, and the inflation rate for PCE excluding food and energy ticked up to 2.0 percent from 1.9 percent.

Energy Prices Down

Prices for energy goods and services taken as a whole fell in July, with most of the major components declining in price. The price index for gasoline and other motor fuel—by expenditure share, the largest energy component—fell 0.6 percent, subtracting about 0.2 annualized percentage points off July’s headline inflation rate. The price indexes for natural gas services and electricity services declined 0.5 percent and 0.4 percent, respectively, while the price index for fuel oil rose 1.2 percent. The price index for energy goods and services taken as a whole declined 0.5 percent for the month.

The price index for gasoline is up 25.4 percent for the 12 months ending in July; it had been up 24.3 percent for the 12 months ending in June. Compared with July 2017, the price index for fuel oil is up 34.7 percent; over the same period, price indexes for electricity services and natural gas services are down 0.8 percent and 1.3 percent, respectively. The price index for energy goods and services as a whole is up 13.4 percent over the 12 months.

After a modest decline in July, the price index for gasoline is likely to show a fairly large increase when PCE data for August are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 0.5 percent decline in August, before seasonal adjustment. The typical seasonal pattern for August—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 3.3 percent decline, making the DOE data consistent with a roughly 2.8 percent seasonally adjusted increase. A price increase of that magnitude would contribute about 0.7 annualized percentage points to August’s headline PCE inflation rate.

Food Prices Up Modestly

The price index for food and beverages purchased for off-premises consumption rose a modest 1.0 percent at an annualized rate in July, following a 2.1 percent annualized increase in June.

Underlying the increase in the aggregate was a 6.5 percent annualized increase in prices of less-processed food items, which more than offset a 1.1 percent annualized decline in prices of more-processed food items.

The price index for food as a whole is up 0.5 percent over the past 12 months. The increase reflects a 1.1 percent increase in the prices of less-processed items and a 0.2 percent increase in the prices of more-processed items.

Core Prices Rise

Prices for core goods rose at a 0.4 percent annualized rate in July, after declining at a 3.0 percent rate a month earlier.

Among core goods, the price indexes for women and girls’ clothing (down an annualized 19.3 percent) and prescription drugs (down an annualized 10.9 percent) had the largest negative impacts on headline inflation, combining to subtract about a full annualized percentage point off July’s headline rate. At the other end of the spectrum, the price index for major household appliances (up an annualized 51.7 percent for the month) had the largest positive impact on headline inflation, contributing a bit more than 0.1 annualized percentage points to July’s headline rate. The price index for major household appliances is up nearly 11 percent (not annualized) since March.

For the 12 months ending in July, prices for core goods are down 0.6 percent; they had been down 0.5 percent for the 12 months ending in June.

Prices for core services, meanwhile, rose at a 2.4 percent annualized rate in July, following a 2.9 percent annualized increase in June. Among components experiencing outsized increases, the price index for the final consumption expenditures of nonprofit institutions serving households (up an annualized 5.7 percent) had the biggest positive impact on all-items inflation, contributing roughly 0.1 annualized percentage points to July’s headline inflation rate. The price index for the nonfee services of nonbank depository institutions (down an annualized 6.2 percent) had the largest negative impact, subtracting about 0.1 annualized percentage points from July’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 3.1 percent annualized rate in July, following a 2.9 percent annualized rate in June. Individually, rent rose at a 3.9 percent annualized rate and OER at a 3.5 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 1.2 percent annualized rate.

For the 12 months through July, the big three index is up 3.2 percent, down from 3.3 percent for the 12 months through June. The price index for core services as a whole rose 2.8 percent for the 12 months ending in July, up 0.1 percent from its increase for the 12 months ending in June.

—Jim Dolmas
August 30, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update