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Behind the Numbers: PCE Inflation Update, October 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 2.2 percent at an annualized rate in October, following a 1.5 percent annualized increase a month earlier. The price index for PCE excluding food and energy rose at a 1.2 percent annualized rate, down from a 1.9 percent rate a month earlier. Food prices fell, while prices for energy goods and services rose sharply.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.6 percent in October, up slightly from an annualized 1.5 percent 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 1.7 percent rate of increase, while the index excluding food and energy averaged an annualized 1.5 percent rate of increase.

The 12-month trimmed mean inflation rate was 1.9 percent in October, down a tenth of a percentage point from its level in September. The 12-month inflation rate for headline PCE was steady at 2.0 percent, while the inflation rate for PCE excluding food and energy ticked down to 1.8 percent from 1.9 percent a month earlier.

Energy Prices Up Sharply

Prices for energy goods and services taken as a whole rose in October, with most of the major components rising in price. The price index for gasoline and other motor fuel—by expenditure share, the largest energy component—rose 3.0 percent, contributing about 0.8 annualized percentage points to October’s headline inflation rate. The price indexes for fuel oil and electricity services rose 3.7 percent and 2.3 percent, respectively, while the price index for natural gas services fell 0.6 percent. The price index for energy goods and services taken as a whole rose 2.4 percent for the month.

The price index for gasoline is up 16.2 percent for the 12 months ending in October; it had been up 9.2 percent for the 12 months ending in September. Compared with October 2017, the price indexes for fuel oil and electricity are up 26.2 percent and 0.7 percent, respectively; over the same period, the price index for natural gas services is down 2.1 percent. The price index for energy goods and services as a whole is up 9.4 percent over the 12 months.

After a sharp increase in October, the price index for gasoline is likely to show a sizable decline when PCE data for November are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 7.4 percent decrease in November, before seasonal adjustment. The typical seasonal pattern for November—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 3.2 percent decline, making the DOE data consistent with a roughly 4.2 percent seasonally adjusted decrease. A price decrease of that magnitude would subtract about 1.2 annualized percentage points off November’s headline PCE inflation rate.

Food Prices Fall

After a negligible increase in September, the price index for food and beverages purchased for off-premises consumption fell an annualized 1.9 percent in October.

Underlying the decline in the aggregate was a 1.5 percent annualized decline in prices of less-processed food items and a 2.0 percent annualized decline 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 0.3 percent over the past 12 months. The increase reflects a 0.5 percent increase in the prices of more-processed items, partly offset by a 0.2 percent decrease in the prices of less-processed items.

Core Goods Prices Up Modestly

Prices for core goods rose at a 0.6 percent annualized rate in October after declining at a 1.4 percent rate a month earlier.

Among core goods, the price index for prescription drugs (down an annualized 6.8 percent) had the largest negative impact on headline inflation, subtracting about 0.3 annualized percentage points from October’s headline rate. At the other end of the spectrum, the price index for used light trucks (up an annualized 32.5 percent) had the largest positive impact on headline inflation, contributing about 0.2 annualized percentage points to October’s headline rate.

For the 12 months ending in October, prices for core goods are down 0.6 percent; they had been down 0.7 percent for the 12 months ending in September.

Prices for core services, meanwhile, rose at a 1.5 percent annualized rate in October, following a 3.0 percent annualized increase in September. Among components experiencing outsized increases, the price index for the consumption expenditures of nonprofit institutions serving households (up an annualized 10.7 percent) had the biggest positive impact on all-items inflation, contributing around 0.3 annualized percentage points to October’s headline inflation rate. The price index for nonprofit hospital services (down an annualized 4.5 percent) had the largest negative impact, subtracting about 0.4 annualized percentage points from October’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 2.7 percent annualized rate in October, following a 2.4 percent annualized rate in September. Individually, rent rose at a 2.7 percent annualized rate and OER at a 3.5 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a scant 0.9 percent annualized rate.

For the 12 months through October, the big three index is up 3.1 percent, compared with 3.2 percent for the 12 months through September. The price index for core services as a whole rose 2.6 percent for the 12 months ending in October, down from 2.8 percent for the 12 months ending in September.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update