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Behind the Numbers: PCE Inflation Update, August 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 1.3 percent at an annualized rate in August, following a 1.6 percent annualized increase a month earlier. The price index for energy goods and services rose sharply, while the price index for food was close to unchanged for the month. The price index for PCE excluding food and energy was close to unchanged, rising just 0.4 percent at an annualized rate, down from a 2.0 percent annualized rate a month earlier. The price index for core goods fell sharply, while the price index for core services rose.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.5 percent in August, down from a revised 2.0 percent annualized rate a month earlier. The trimmed mean rate for July was initially reported as an annualized 1.6 percent.

Over the past six months, the trimmed mean has averaged an annualized 1.9 percent rate of increase. Over the same period, the headline index has averaged an annualized rate of 1.7 percent, while the index excluding food and energy has averaged an annualized rate of 1.8 percent.

The 12-month trimmed mean inflation rate was 2.0 percent in August, identical to its level in July. The 12-month inflation rate for headline PCE ticked down to 2.2 percent from 2.3 percent in July; the 12-month inflation rate for PCE excluding food and energy held steady at 2.0 percent.

Energy Prices Up Sharply

Prices for energy goods and services taken as a whole rose in August, with all of the major components seeing increases. The price index for gasoline and other motor fuel—by expenditure share, the largest energy component—climbed 3.0 percent, alone contributing about 0.8 annualized percentage points to August’s headline inflation rate. The price indexes for natural gas services and electricity services rose 0.9 percent and 0.3 percent, respectively, while the price index for fuel oil rose 2.2 percent. The price index for energy goods and services taken as a whole rose 1.9 percent in August, its largest one-month increase since January.

The price index for gasoline was up 20.3 percent for the 12 months ending in August; it had been up 25.4 percent for the 12 months ending in July. Compared with August 2017, the price indexes for fuel oil and natural gas services were up 30.9 percent and 0.1 percent, respectively. Over the same period, the price index for electricity services was down 0.5 percent. The price index for energy goods and services as a whole was up 11.3 percent over the 12 months.

After sharply increasing in August, the price index for gasoline is likely to show a modest decline when PCE data for September are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices are nearly unchanged so far in September, up just 0.03 percent from August, before seasonal adjustment. The typical seasonal pattern for September—what we would expect given normal changes in supply-and-demand conditions—amounts to an increase of a bit more than 0.5 percent, making the DOE data consistent with a roughly 0.5 percent seasonally adjusted decline. A price decline of that magnitude—which, for gasoline, is modest in absolute size—would have only a negligible impact on September’s headline PCE inflation rate.

Food Prices Close to Unchanged

The price index for food and beverages purchased for off-premises consumption fell a scant 0.5 percent at an annualized rate in August, or less than 0.1 percent at a monthly rate. The negligible decline follows a 1.0 percent annualized increase in July.

Underlying the small decline in the aggregate was a 2.2 percent annualized decline in prices of less-processed food items, which was largely offset by a small 0.1 percent annualized increase in prices of more-processed food items. More-processed food items, by expenditure weight, make up roughly 72 percent of food as a whole.

The price index for food as a whole is up 0.5 percent over the past 12 months. The increase reflects a 1.0 percent increase in the prices of less-processed items and a 0.3 percent increase in the prices of more-processed items.

Core Prices Fall Sharply

Prices for core goods fell at a 4.8 percent annualized rate in August after rising at a 0.4 percent rate a month earlier. August’s decline is the largest one-month drop in the index of core goods prices since May 2003.

Among core goods, the price indexes for women’s and girls’ clothing (down an annualized 19.0 percent) and men’s and boys’ clothing (down an annualized 22.3 percent) had the largest negative impacts on headline inflation, combining to subtract roughly half an annualized percentage point off August’s headline rate. At the other end of the spectrum, the price index for personal computers, tablets and peripheral equipment (up an annualized 18.2 percent for the month) had the largest positive impact on headline inflation, contributing a bit less than 0.1 annualized percentage points to August’s headline rate.

For the 12 months ending in August, prices for core goods were down 0.8 percent; they had been down 0.6 percent for the 12 months ending in July.

Prices for core services, meanwhile, rose at a 2.2 percent annualized rate in August following a 2.6 percent annualized increase in July. Among components experiencing outsized increases, the price index for the final consumption expenditures of nonprofit institutions serving households (up an annualized 17.3 percent) had the biggest positive impact on all-items inflation, contributing roughly 0.5 annualized percentage points to August’s headline inflation rate. The price index for nonprofit hospital services (down an annualized 1.4 percent) had the largest negative impact, subtracting a bit less than 0.2 annualized percentage points.

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 August versus a 3.1 percent rate in July. Individually, rent rose at a 4.4 percent annualized rate and OER at a 3.2 percent rate, while dining out (more formally, “other purchased meals”) rose at a 2.3 percent rate.

For the 12 months through August, the big three index was up 3.2 percent, identical to its increase for the 12 months through July. The price index for core services as a whole rose 2.9 percent for the 12 months ending in August, also identical to its increase for the 12 months ending in July.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update