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Behind the Numbers: PCE Inflation Update, January 2019

NOTICE: Due to the government shutdown, which delayed release of the Bureau of Economic Analysis’ (BEA) Personal Outlays report, we will be releasing Trimmed Mean PCE inflation data one month behind the normal schedule until April 29, 2019.

This update, prepared by Dallas Fed Senior Economist Jim Dolmas, provides an in-depth analysis of the latest personal consumption expenditures (PCE) inflation data. NOTE: Terms in bold are defined in the Inflation Update Glossary.

The headline, or all-items, PCE price index declined 0.7 percent at an annualized rate in January following a 0.7 percent annualized increase a month earlier. The price index for PCE excluding food and energy rose at a 0.8 percent annualized rate following a 2.3 percent annualized increase a month earlier. As was the case in December, food prices rose, while prices for energy goods and services fell sharply.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.1 percent in January following an annualized 1.7 percent a month earlier.

Over the six months ending in January, the trimmed mean averaged an annualized 1.7 percent rate of increase. Over the same period, the headline PCE and core indexes averaged annualized rates of increase of 0.9 percent and 1.5 percent, respectively.

The 12-month trimmed mean inflation rate was 1.8 percent in January, breaking a string of seven months at 2.0 percent. The 12-month inflation rate for headline PCE declined to 1.4 percent from 1.8 percent a month earlier, while the inflation rate for PCE excluding food and energy declined to 1.8 percent from 2.0 percent a month earlier.

Gasoline Prices Down Sharply Again

Prices for energy goods and services taken as a whole fell in January, led by a 5.5 percent decline in the price index for gasoline and other motor fuel. The drop in the gasoline index subtracted about 1.4 annualized percentage points off January’s headline inflation rate. Other energy components also declined, with price indexes falling 1.3 percent for fuel oil, 0.3 percent for natural gas services and 0.6 percent for electricity services. The price index for energy goods and services taken as a whole fell 3.2 percent in January, similar to its declines in each of the two prior months.

The price index for gasoline is down 11.9 percent for the 12 months ending in January; it had been down 1.5 percent for the 12 months ending in December. Compared with January 2018, the price indexes for fuel oil and electricity services are down 6.6 percent and 0.2 percent, respectively, and the price index for natural gas services is up 3.8 percent. The price index for energy goods and services as a whole is down 6.4 percent over the 12 months.

After posting sharp declines in November, December and January, the price index for gasoline is sure to show a modest increase when PCE data for February are released. Consumer Price Index (CPI) data for February are already available and show a seasonally adjusted 1.5 percent increase 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 8.4 percent increase in March, before seasonal adjustment. The typical seasonal pattern for March—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 2.3 percent increase, making the DOE data consistent with a roughly 6.1 percent seasonally adjusted increase.

Price increases of the magnitudes expected for February and March would contribute about 0.4 and 1.7 annualized percentage points, respectively, to February’s and March’s headline PCE inflation rates.

Food Prices Up

The price index for food and beverages purchased for off-premises consumption rose an annualized 2.0 percent in January. This follows an annualized 1.6 percent increase in December.

Underlying the increase in the aggregate was a sharp 3.9 percent annualized increase in the prices of less-processed food items. Prices for more-processed food items rose 1.3 percent at an annualized rate.

The price index for food as a whole is up 0.8 percent over the 12 months ending in January. The 12-month increase reflects a 0.4 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 Rise Sharply, Services Prices Fall

Prices for core goods rose at a robust 5.6 percent annualized rate in January, their largest one-month increase since April 2009.

Among core goods, the price index for computer software and accessories (down an annualized 18.6 percent) had the largest negative impact on headline inflation, subtracting about 0.1 annualized percentage points from January’s headline rate. At the other end of the spectrum, the price index for women’s and girls’ clothing (up an annualized 20.2 percent) had the largest positive impact on headline inflation, contributing about 0.2 annualized percentage points to January’s headline rate.

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

Prices for core services, meanwhile, fell at a 0.7 percent annualized rate in January following a 3.3 percent annualized increase in December. Declines in the core services price index are rare, occurring just three times in the past 10 years. Among components experiencing outsized increases, the price index for nonprofit hospital services (up an annualized 5.5 percent) had the biggest positive impact on all-items inflation, contributing around 0.3 annualized percentage points to January’s headline inflation rate. The price index for financial service charges, fees and commissions (down an annualized 28.4 percent) had the largest negative impact, subtracting about 0.9 annualized percentage points from January’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 3.8 percent annualized rate in January following a 3.2 percent annualized increase in December. Individually, rent rose at a 3.8 percent annualized rate and OER at a 3.4 percent annualized rate, while dining out (more formally, “other purchased meals”) rose at a 4.8 percent annualized rate.

For the 12 months through January, the big three index is up 3.1 percent, identical to its increase for the 12 months through December. The price index for core services as a whole rose 2.5 percent for the 12 months ending in January, down from 2.7 percent for the 12 months ending in December.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update