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Behind the Numbers: PCE Inflation Update, July 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 3.9 percent in July after rising an annualized 6.0 percent in June. The price index for PCE excluding food and energy rose at a 4.3 percent annualized rate, compared with an annualized 4.0 percent increase a month earlier. Prices for energy goods and services rose, while prices for food fell sharply.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.0 percent in July, compared with a 1.4 percent rate in June.

Over the six months ending in July, the trimmed mean averaged an annualized 1.6 percent rate of increase. Over the same period, the headline and core indexes averaged annualized rates of 0.4 percent and 0.9 percent, respectively.

The 12-month trimmed mean inflation rate was 1.8 percent in July, unchanged from June. The 12-month inflation rate for headline PCE was 1.0 percent, up from 0.9 percent in June, while the 12-month inflation rate for PCE excluding food and energy was 1.3 percent, up from 1.1 percent in June.

Gasoline Prices Increase

The price index for gasoline and other motor fuel rose 5.5 percent in July after increasing 12.0 percent in June. The gasoline price index alone contributed about 1.0 annualized percentage points to July’s headline inflation rate. Among other energy components, the price indexes for fuel oil and electricity services rose 4.3 percent and 0.3 percent, respectively, while the price index for natural gas services fell 1.0 percent. The price index for energy goods and services as a whole rose 2.5 percent.

The price index for gasoline is down 20.3 percent for the 12 months ending in July; it had been down 23.3 percent for the 12 months ending in June. Compared with July 2019, the price indexes for fuel oil, electricity and natural gas are down 27.2 percent, 0.1 percent and 0.3 percent, respectively. The price index for energy goods and services as a whole is down 11.4 percent over the 12 months.

After July’s sharp increase, the price index for gasoline is likely to show another gain when PCE data for August are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 0.4 percent decrease in August, before seasonal adjustment. But the typical seasonal pattern for August—what we would expect given normal changes in supply-and-demand conditions—amounts to about a 1.9 percent decrease, making the DOE data consistent with a roughly 1.5 percent seasonally adjusted increase. A price increase of that magnitude would contribute about 0.3 annualized percentage points to August’s headline PCE inflation rate.

Food Prices Record Steep Decline

The price index for food and beverages purchased for off-premises consumption fell at a 10.5 percent annualized rate in July after increasing at a 6.4 percent rate in June. Underlying the decrease in the aggregate were sharp declines in the prices of both less-processed food items (down an annualized 25.4 percent) and more-processed food items (down an annualized 3.9 percent).

The price index for food as a whole is up 4.3 percent over the 12 months ending in July. The 12-month increase in the aggregate reflects a 6.3 percent increase in the prices of less-processed items and a 3.6 percent increase in the prices of more-processed items.

Prices for Core Goods and Services Up Sharply in July

Prices for core goods rose an annualized 6.3 percent in July after rising an annualized 8.9 percent in June.

Among core goods, the price index for furniture (down an annualized 9.1 percent) had the largest negative impact on core inflation, subtracting about 0.1 annualized percentage points from July’s core rate. At the other end of the spectrum, the price index for computer software and accessories (up an annualized 39.5 percent) had the largest positive impact, contributing about 0.3 annualized percentage points to July’s core rate.

For the 12 months ending in July, prices for core goods are down 0.5 percent, compared with a 1.2 percent decline for the 12 months ending in June.

Prices for core services, meanwhile, rose an annualized 3.5 percent in July after recording a 2.5 percent annualized increase in June. Among components experiencing outsized changes, the price index for air transportation (down an annualized 79.7 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 0.6 annualized percentage points from July’s core rate. The price index for financial service charges, fees and commissions (up an annualized 52.5 percent) had the largest positive impact among components experiencing outsized changes, contributing about 1.3 annualized percentage points to July’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 3.4 percent annualized rate in July, compared with a 2.3 percent rate of increase in June. Individually, the annualized increases were 2.3 percent for rent, 2.6 percent for OER and 6.8 percent for dining out (more formally, “other purchased meals”).

For the 12 months through July, the big three index is up 3.1 percent, compared with 3.0 percent for the 12 months through June. The price index for core services as a whole rose 1.8 percent for the 12 months ending in July, identical to its increase for the 12 months through June.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update
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