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Behind the Numbers: PCE Inflation Update, September 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 September, following a 1.3 percent annualized increase a month earlier. The price index for PCE excluding food and energy rose at a 1.9 percent annualized rate, up from a negligible 0.4 percent rate a month earlier. Food prices were essentially unchanged, while prices for energy goods and services declined.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.4 percent in September, down from an annualized 1.7 percent increase a month earlier.

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 a 1.9 percent annualized rate of increase.

The 12-month trimmed mean inflation rate was 2.0 percent in September, identical to its level over the previous three months. The 12-month inflation rate for headline PCE decreased to 2.0 percent from 2.2 percent in August, and the inflation rate for PCE excluding food and energy held steady at 2.0 percent.

Energy Prices Down

Prices for energy goods and services taken as a whole fell in September, 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 0.2 percent, subtracting about 0.1 annualized percentage points off September’s headline inflation rate. The price indexes for natural gas services and electricity services declined 1.7 percent and 0.4 percent, respectively, while the price index for fuel oil rose 0.3 percent. The decline in electricity prices also subtracted about 0.1 annualized percentage points from the headline inflation rate. The price index for energy goods and services taken as a whole declined 0.4 percent for the month.

The price index for gasoline is up 9.2 percent for the 12 months ending in September; it had been up 20.3 percent for the 12 months ending in August. Compared with September 2017, the price index for fuel oil is up 23.4 percent; over the same period, price indexes for electricity services and natural gas services are both down 1.2 percent. The price index for energy goods and services as a whole is up 5.1 percent over the 12 months.

After a modest decline in September, the price index for gasoline is likely to show a fairly large increase when PCE data for October are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices recording a roughly 1.0 percent increase in October, before seasonal adjustment. The typical seasonal pattern for October—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 2.3 percent decline, making the DOE data consistent with a roughly 3.3 percent seasonally adjusted increase. A price increase of that magnitude would contribute about 0.9 annualized percentage points to October’s headline PCE inflation rate.

Food Prices Steady

The price index for food and beverages purchased for off-premises consumption was close to unchanged in September, rising just 0.5 percent at an annualized rate (or just 0.04 percent before annualization).

Underlying the negligible increase in the aggregate was a 9.5 percent annualized decline in prices of less-processed food items, which was offset by a 4.6 percent annualized increase in prices of more-processed food items. More-processed items make up about 70 percent of off-premises food expenditure.

The price index for food as a whole is up 0.5 percent over the past 12 months. The increase reflects a 0.4 percent increase in the prices of less-processed items and a 0.6 percent increase in the prices of more-processed items.

Core Goods Prices Fall Modestly, Services Prices Rise

Prices for core goods fell at a 1.5 percent annualized rate in September after declining at a 4.9 percent rate a month earlier.

Among core goods, the price indexes for used light trucks (down an annualized 23.8 percent) and prescription drugs (down an annualized 2.2 percent) had the largest negative impacts on headline inflation, combining to subtract about 0.3 annualized percentage points from September’s headline rate. At the other end of the spectrum, the price index for women’s and girls’ clothing (up an annualized 18.8 percent for the month) and men’s and boys’ clothing (up an annualized 29.9 percent) had the largest positive impacts on headline inflation, combining to contribute about 0.4 annualized percentage points to September’s headline rate.

For the 12 months ending in September, prices for core goods are down 0.7 percent; they had been down 0.8 percent for the 12 months ending in August.

Prices for core services, meanwhile, rose at a 3.0 percent annualized rate in September, following a 2.2 percent annualized increase in August. Among components experiencing outsized increases, the price index for air transportation (up an annualized 91.9 percent) had the biggest positive impact on all-items inflation, contributing around 0.5 annualized percentage points to September’s headline inflation rate. The price index for hotels and motels (down an annualized 13.1 percent) had the largest negative impact, subtracting about 0.1 annualized percentage points from September’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 2.4 percent annualized rate in September, following a 3.2 percent annualized rate in August. Individually, rent rose at a 2.9 percent annualized rate and OER at a 2.2 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 2.6 percent annualized rate.

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

—Jim Dolmas
November 29, 2018

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update