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Behind the Numbers: PCE Inflation Update, January 2020

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 1.2 percent in January after increasing an annualized 3.0 percent in December. The price index for PCE excluding food and energy rose an annualized 1.5 percent, compared with an annualized 2.6 percent increase a month earlier. Prices for energy goods and services declined, driven mainly by a fall in the price of gasoline. Food prices posted their sharpest rise in several months, due mainly to an increase in prices of more-processed food items.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.2 percent in January, compared with an annualized 1.7 percent a month earlier.

Over the six months ending in January, the trimmed mean averaged an annualized 1.9 percent rate of increase. Over the same period, the headline and core indexes averaged annualized rates of 1.3 percent and 1.4 percent, respectively.

The 12-month trimmed mean inflation rate was 2.1 percent in January, up 0.1 percentage points from December. The 12-month inflation rate for headline PCE increased to 1.7 percent from 1.5 in December, while the 12-month inflation rate for PCE excluding food and energy ticked up to 1.6 percent from 1.5 percent in December.

Gasoline Prices Down in January

The price index for gasoline and other motor fuel fell 1.6 percent in January after increasing 3.1 percent in December. The gasoline price index alone subtracted about 0.6 annualized percentage points from January’s headline inflation rate. Among other energy components, the price index for fuel oil fell 0.3 percent, while the price indexes for electricity services and natural gas services rose 0.4 percent and 1.0 percent, respectively. Taken as a whole, the prices of energy goods and services declined 0.7 percent for the month.

The price index for gasoline is up 11.1 percent for the 12 months ending in January; it had been up 7.1 percent for the 12 months ending in December. Compared with January 2019, the price indexes for electricity and natural gas are down 0.2 percent and 4.7 percent, respectively, while the price index for fuel oil is up 5.2 percent. The price index for energy goods and services as a whole is up 5.6 percent over the 12 months.

After January’s 1.6 percent decline, the price index for gasoline is likely to show an even larger drop when PCE data for February are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 3.9 percent decrease 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 about a 0.4 percent decline, making the DOE data consistent with a roughly 3.5 percent seasonally adjusted decline. A price decline of that magnitude would subtract about 0.9 annualized percentage points from February’s headline PCE inflation rate.

Food Prices Post Sizeable Increase

The price index for food and beverages purchased for off-premises consumption rose at a 3.2 percent annualized rate in January, the index’s largest one-month increase since May 2019. The intervening months saw the index decline at an average annualized rate of 0.2 percent.

Underlying the increase in the aggregate was a sharp increase in the prices of more-processed food items, which rose at a 4.0 percent annualized rate. Prices of less-processed food items recorded a more modest increase of an annualized 1.2 percent.

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

Core Goods Prices Up Solidly, Services Modestly

Prices for core goods rose an annualized 1.3 percent in January after falling an annualized 0.9 percent in December. (By way of context, core goods prices have averaged an annualized 0.5 percent rate of decline over the past 20 years, so an annualized 1.3 percent increase is on the large side.)

Among core goods, the price index for prescription drugs (down an annualized 4.8 percent) had the largest negative impact on core inflation, subtracting about 0.2 annualized percentage points from January’s core rate. At the other end of the spectrum, the price index for household linens (up an annualized 116.4 percent) had the largest positive impact, contributing about 0.3 annualized percentage points to January’s core rate.

For the 12 months ending in January, prices for core goods are down 0.9 percent, compared with a 0.6 percent decline for the 12 months ending in December.

Prices for core services, meanwhile, rose at a 1.6 percent annualized rate in January after recording a 3.7 percent annualized increase in December. Among components experiencing outsized changes, the price index for consumption expenditures of the nonprofit sector (down an annualized 18.2 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 0.7 annualized percentage points from January’s core rate. The price index for nonprofit hospital services (up an annualized 8.8 percent) had the largest positive impact, contributing about 0.5 annualized percentage points to January’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 4.4 percent annualized rate in January, compared with a 3.3 percent rate of increase in December. Individually, the annualized increases were 4.4 percent for rent, 4.2 percent for OER and 4.8 percent for dining out (more formally, “other purchased meals”).

For the 12 months through January, the big three index is up 3.4 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, up from 2.3 percent for the 12 months through December.