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Behind the Numbers: PCE Inflation Update, February 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 1.1 percent in February after increasing an annualized 1.7 percent in January. The price index for PCE excluding food and energy rose an annualized 1.9 percent, compared with an annualized 2.0 percent increase a month earlier. Prices for energy goods and services declined, led by a sharp decline in the price of gasoline. Food prices posted a second consecutive sharp increase, owing mainly to an increase in prices of more-processed food items.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.4 percent in February, compared with an annualized 2.3 percent a month earlier.

Over the six months ending in February, 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 1.5 percent and 1.6 percent, respectively.

The 12-month trimmed mean inflation rate was 2.0 percent in February, down 0.1 percentage points from January. The 12-month inflation rate for headline PCE held steady at 1.8 in February, while the 12-month inflation rate for PCE excluding food and energy ticked up to 1.8 percent from 1.7 percent a month earlier.

Gasoline Prices Down in February

The price index for gasoline and other motor fuel fell 3.3 percent in February after falling 1.6 percent in January. The gasoline price index alone subtracted about 0.9 annualized percentage points from February’s headline inflation rate. Among other energy components, the price index for fuel oil fell 8.5 percent, while the price indexes for electricity services and natural gas services fell 0.1 percent and 0.9 percent, respectively. Taken as a whole, the prices of energy goods and services declined 2.1 percent for the month.

The price index for gasoline is up 6.3 percent for the 12 months ending in February; it had been up 11.6 percent for the 12 months ending in January. Compared with February 2019, the price indexes for electricity and natural gas are down 0.1 percent and 3.3 percent, respectively, while the price index for fuel oil is down 6.2 percent. The price index for energy goods and services as a whole is up 2.8 percent over the 12 months.

After February’s 3.3 percent decline, the price index for gasoline is likely to show an even larger drop when PCE data for March are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 5.8 percent decrease 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 about a 3.5 percent increase, making the DOE data consistent with a roughly 9.3 percent seasonally adjusted decline. A price decline of that magnitude would subtract about 2.4 annualized percentage points from March’s headline PCE inflation rate.

Food Prices Post Another Sizable Increase

The price index for food and beverages purchased for off-premises consumption rose at a 5.5 percent annualized rate in February, after increasing at a 3.2 percent rate in January. Underlying the increase in the aggregate was a sharp increase in the prices of more-processed food items, which rose at a 6.8 percent annualized rate. Prices of less-processed food items rose an annualized 2.4 percent.

The price index for food as a whole is up 0.8 percent over the 12 months ending in February. The 12-month increase in the aggregate reflects a 0.7 percent increase in the prices of less-processed items and a 0.8 percent increase in the prices of more-processed items.

Core Goods, Services Prices Up in February

Prices for core goods rose an annualized 0.4 percent in February, after rising an annualized 1.4 percent in January.

Among core goods, the price index for prescription drugs (down an annualized 9.7 percent) had the largest negative impact on core inflation, subtracting about 0.4 annualized percentage points from February’s core rate. At the other end of the spectrum, the price index for women’s and girls’ clothing (up an annualized 18.7 percent) had the largest positive impact, contributing about 0.2 annualized percentage points to February’s core rate.

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

Prices for core services, meanwhile, rose at a 2.4 percent annualized rate in February after recording a 2.2 percent annualized increase in January. Among components experiencing outsized changes, the price index for nonprofit hospital services (down an annualized 2.8 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 0.2 annualized percentage points from February’s core rate. The price index for the consumption expenditures of the nonprofit sector (up an annualized 24.2 percent) had the largest positive impact, contributing about 0.7 annualized percentage points to February’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 February, compared with a 4.4 percent rate of increase in January. Individually, the annualized increases were 3.8 percent for rent, 3.0 percent for OER and 3.0 percent for dining out (more formally, “other purchased meals”).

For the 12 months through February, the big three index is up 3.3 percent, compared with a 3.4 percent increase for the 12 months through January. The price index for core services as a whole rose 2.6 percent for the 12 months ending in February, identical to its increase for the 12 months through January.