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Behind the Numbers: PCE Inflation Update, August 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 August after rising an annualized 4.7 percent in July. The price index for PCE excluding food and energy rose at a 4.1 percent annualized rate, compared with an annualized 5.2 percent increase a month earlier. Prices for energy goods and services rose, while prices for food fell.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 2.6 percent in August, compared with a 2.3 percent rate in July.

Over the six months ending in August, 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 1.1 percent and 1.6 percent, respectively.

The 12-month trimmed mean inflation rate was 1.9 percent in August, unchanged from July. The 12-month inflation rate for headline PCE was 1.4 percent, up from 1.1 percent in July, while the 12-month inflation rate for PCE excluding food and energy was 1.6 percent, up from 1.4 percent in July.

Energy Prices Rise in August

The price index for gasoline and other motor fuel rose 2.0 percent in August after increasing 5.5 percent in July. The gasoline price index alone contributed about 0.4 annualized percentage points to August’s headline inflation rate. Among other energy components, the price index for fuel oil rose 3.9 percent, while the price indexes for natural gas services and electricity services both fell 0.2 percent. The price index for energy goods and services as a whole rose 0.8 percent.

The price index for gasoline is down 16.8 percent for the 12 months ending in August; it had been down 20.3 percent for the 12 months ending in July. Compared with August 2019, the price indexes for fuel oil, electricity and natural gas are down 23.6 percent, 0.1 percent and 0.5 percent, respectively. The price index for energy goods and services as a whole is down 9.4 percent over the 12 months.

After August’s increase, the price index for gasoline is likely to show a small decline when PCE data for September are released. Weekly retail price data from the Department of Energy (DOE) show gasoline prices on track for a roughly 0.1 percent increase in September, before seasonal adjustment. But the typical seasonal pattern for September—what we would expect given normal changes in supply-and-demand conditions—amounts to about a 0.6 percent increase, making the DOE data consistent with a roughly 0.5 percent seasonally adjusted decrease. A price decrease of that magnitude would subtract about 0.1 annualized percentage points from September’s headline PCE inflation rate.

Food Prices Record Another Decline

The price index for food and beverages purchased for off-premises consumption fell at a 1.4 percent annualized rate in August after declining at a 10.5 percent rate in July. Underlying the decrease in the aggregate was a sharp decline in the prices of less-processed food items (down an annualized 9.3 percent) that more than offset an increase in the prices of more-processed food items (up an annualized 1.9 percent).

The price index for food as a whole is up 4.3 percent over the 12 months ending in August. The 12-month increase in the aggregate reflects a 5.9 percent increase in the prices of less-processed items and a 3.7 percent increase in the prices of more-processed items.

Prices for Core Goods and Services Up Sharply

Prices for core goods rose an annualized 6.4 percent in August after rising an annualized 9.3 percent in July.

Among core goods, the price index for computer software and accessories (down an annualized 14.8 percent) had the largest negative impact on core inflation, subtracting about 0.2 annualized percentage points from August’s core rate. At the other end of the spectrum, the price index for used light trucks (up an annualized 66.5 percent) had the largest positive impact, contributing about 0.6 annualized percentage points to August’s core rate.

For the 12 months ending in August, prices for core goods are up 0.2 percent, compared with a 0.3 percent decline for the 12 months ending in July. August marks the first 12-month increase in the price index for core goods since late 2012.

Prices for core services, meanwhile, rose an annualized 3.2 percent in August after recording a 3.7 percent annualized increase in July. Among components experiencing outsized changes, the price index for air transportation (down an annualized 32.1 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 0.2 annualized percentage points from August’s core rate. The price index for physician services (up an annualized 9.7 percent) had the largest positive impact among components experiencing outsized changes, contributing about 0.4 annualized percentage points to August’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 1.8 percent annualized rate in August, compared with a 3.4 percent rate of increase in July. Individually, the annualized increases were 1.1 percent for rent, 1.5 percent for OER and 3.5 percent for dining out (more formally, “other purchased meals”).

For the 12 months through August, the big three index is up 3.0 percent, compared with 3.1 percent for the 12 months through July. The price index for core services as a whole rose 2.0 percent for the 12 months ending in August, up from 1.9 percent for the 12 months through July.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update
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