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Behind the Numbers: PCE Inflation Update, December 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 rose an annualized 3.2 percent in December after increasing an annualized 1.3 percent in November. The price index for PCE excluding food and energy rose an annualized 2.8 percent, compared with an annualized 0.9 percent increase a month earlier. Prices for energy goods and services rose sharply, driven mainly by the price of gasoline, while food prices were close to unchanged for the month.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.7 percent in December, compared with an annualized 1.9 percent a month earlier.

Over the six months ending in December, the trimmed mean averaged an annualized 2.0 percent rate of increase. Over the same period, the headline and core indexes both averaged annualized rates of 1.7 percent.

The 12-month trimmed mean inflation rate was 2.0 percent in December, unchanged from November. The 12-month inflation rate for headline PCE increased to 1.6 percent from 1.4 in November, while the 12-month inflation rate for PCE excluding food and energy ticked up to 1.6 percent from 1.5 percent in November.

Gasoline Prices Up Sharply in December

The price index for gasoline and other motor fuel rose 2.8 percent in December after increasing 1.1 percent in November. The gasoline price index alone contributed about 0.7 annualized percentage points to December’s headline inflation rate. Among other energy components, the price indexes for fuel oil and natural gas services rose 1.6 percent and 0.3 percent, respectively, while the price index for electricity services declined 0.5 percent. Taken as a whole, the prices of energy goods and services rose 1.5 percent for the month.

The price index for gasoline is up 7.6 percent for the 12 months ending in December; it had been down 1.3 percent for the 12 months ending in November. Compared with December 2018, the price indexes for electricity and natural gas are down 0.4 percent and 3.5 percent, respectively, while the price index for fuel oil is up 4.6 percent. The price index for energy goods and services as a whole is up 3.7 percent over the 12 months.

After December’s big increase, the price index for gasoline is likely to show a modest decline when PCE data for January are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 0.3 percent decrease in January, before seasonal adjustment. The typical seasonal pattern for January—what we would expect given normal changes in supply-and-demand conditions—amounts to about a 0.4 percent increase, making the DOE data consistent with a roughly 0.7 percent seasonally adjusted decline. A price decline of that magnitude would subtract about 0.2 annualized percentage points from January’s headline PCE inflation rate.

Food Prices (Again) Close to Unchanged

The price index for food and beverages purchased for off-premises consumption was close to unchanged in December, falling an annualized 0.3 percent. The slight decline follows a similarly negligible 0.5 percent annualized increase in November.

Underlying the change in the aggregate were roughly offsetting, relatively sharp moves in the prices of less-processed and more-processed food items. The former rose an annualized 10.6 percent, while the latter—which makes up a larger share of overall food expenditures—fell an annualized 4.3 percent.

The price index for food as a whole is up 0.8 percent over the 12 months ending in December. The 12-month increase in the aggregate reflects a 1.2 percent increase in the prices of less-processed items and a 0.6 percent increase in the prices of more-processed food items.

Core Goods Prices Little Changed; Services Up in December

Prices for core goods were close to unchanged in December, rising an annualized 0.5 percent, after falling an annualized 1.5 percent in November.

Among core goods, the price index for major household appliances (down an annualized 30.7 percent) had the largest negative impact on core inflation, subtracting about 0.1 annualized percentage points from December’s core rate. At the other end of the spectrum, the price index for prescription drugs (up an annualized 28.4 percent) had the largest positive impact, contributing about 0.9 annualized percentage points to December’s core rate.

For the 12 months ending in December, prices for core goods are down 0.4 percent, compared with a 0.5 percent decline for the 12 months ending in November.

Prices for core services, meanwhile, rose at a 3.5 percent annualized rate in December after recording a 1.7 percent annualized increase in November. Among components experiencing outsized changes, the price index for hotels and motels (down an annualized 21.9 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 0.2 annualized percentage points from December’s core rate. The price index for air transportation (up an annualized 99.4 percent) had the largest positive impact, contributing about 0.6 annualized percentage points to December’s core 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, compared with a 2.7 percent rate of increase in November. Individually, the annualized increases were 2.9 percent for both rent and OER and 4.0 percent for dining out (more formally, “other purchased meals”).

For the 12 months through December, the big three index is up 3.3 percent, identical to its increase for the 12 months through November. The price index for core services as a whole rose 2.2 percent for the 12 months ending in December, also unchanged from November.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update
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