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Behind the Numbers: PCE Inflation Update, December 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 0.7 percent at an annualized rate in December following a 0.6 percent annualized increase a month earlier. The price index for PCE excluding food and energy rose at a 2.3 percent annualized rate following a 2.1 percent rate a month earlier. As was the case in November, food prices rose, while prices for energy goods and services fell sharply.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.7 percent in December following an annualized 2.4 percent a month earlier.

Over the six months ending in December, the trimmed mean averaged an annualized 1.8 percent rate of increase. Over the same period, the headline and core indexes averaged annualized rates of increase of 1.3 percent and 1.7 percent, respectively.

The 12-month trimmed mean inflation rate was 2.0 percent in December, its seventh consecutive month at that level. The 12-month inflation rate for headline PCE ticked down to 1.7 percent from 1.8 percent a month earlier, while the inflation rate for PCE excluding food and energy held steady at 1.9 percent.

Gasoline Prices Down Sharply Again

Prices for energy goods and services taken as a whole fell in December, led by a 5.7 percent decline in the price index for gasoline and other motor fuel. The drop in the gasoline index subtracted about 1.6 annualized percentage points off December’s headline inflation rate. Other energy components were mixed, with the price index for fuel oil falling 9.4 percent, while the price indexes for electricity services and natural gas services recorded increases of 0.4 percent and 5.1 percent, respectively. The price index for energy goods and services taken as a whole fell 2.9 percent for the month, nearly identical to its decline in November.

The price index for gasoline is down 1.5 percent for the 12 months ending in December; it had been up 3.7 percent for the 12 months ending in November. Compared with December 2017, the price indexes for fuel oil and natural gas are up 3.5 percent and 1.4 percent, respectively; the price index for electricity services, which tends to be less volatile, is up 0.2 percent over the same period. The price index for energy goods and services as a whole is down 0.4 percent over the 12 months. The last time the overall energy price index was down on a 12-month basis was October 2016.

After posting sharp declines in November and December, the price index for gasoline is sure to show a third, similar-sized decline when PCE data for January are released. Consumer Price Index (CPI) data for January are already available and show a seasonally adjusted 5.5 percent decline in the CPI for motor fuel. (Changes in the PCE price index for gasoline and other motor fuel tend to be virtually indistinguishable from changes in the CPI for motor fuel.)

Looking further ahead, weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 2.3 percent increase in February, before seasonal adjustment. The typical seasonal pattern for February—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 1.2 percent increase, making the DOE data consistent with a roughly 1.1 percent seasonally adjusted increase.

Price changes of the magnitudes expected for January and February would subtract about 1.6 annualized percentage points off January’s headline PCE inflation rate and add about 0.3 annualized percentage points to February’s headline rate.

Food Prices Rise

The price index for food and beverages purchased for off-premises consumption rose an annualized 1.6 percent in December. This follows an annualized 2.3 percent increase in November.

Underlying the increase in the aggregate was a sharp 5.1 percent annualized increase in the prices of less-processed food items. Prices for more-processed food items were close to unchanged, rising a negligible 0.3 percent at an annualized rate.

The price index for food as a whole is up 0.6 percent over the 12 months ending in December. The 12-month increase reflects a 0.2 percent decrease in the prices of less-processed items that was more than offset by a 0.9 percent increase in the prices of more-processed items.

Core Goods Prices Down, Services Prices Up

Prices for core goods fell at a 0.6 percent annualized rate in December, similar to their rate of decline a month earlier.

Among core goods, the price index for prescription drugs (down an annualized 4.4 percent) had the largest negative impact on headline inflation, subtracting about 0.2 annualized percentage points from December’s headline rate. At the other end of the spectrum, the price indexes for pleasure boats and “other recreational vehicles” (each up an annualized 117 percent) had the largest positive impacts on headline inflation, combining to contribute about 0.3 annualized percentage points to December’s headline rate.

For the 12 months ending in December, prices for core goods are down 0.4 percent, identical to their decline for the 12 months ending in November.

Prices for core services, meanwhile, rose at a 3.2 percent annualized rate in December following a 3.0 percent annualized increase in November. Among components experiencing outsized increases, the price index for the nonfee services of “other depository institutions and regulated investment companies” (up an annualized 30.1 percent) had the biggest positive impact on all-items inflation, contributing around 0.3 annualized percentage points to December’s headline inflation rate. The price index for air transportation (down an annualized 18.7 percent) had the largest negative impact, subtracting about 0.2 annualized percentage points from December’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 3.2 percent annualized rate in December following a 3.7 percent annualized increase in November. Individually, rent rose at a 2.5 percent annualized rate and OER at a 2.7 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 5.1 percent annualized rate, its biggest one-month increase since October 2008.

For the 12 months through December, the big three index is up 3.1 percent, compared with 3.2 percent for the 12 months through November. The price index for core services as a whole rose 2.7 percent for the 12 months ending in December, identical to its increase for the 12 months ending in November.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update