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Behind the Numbers: PCE Inflation Update, December 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 5.2 percent in December after being effectively unchanged in November. The price index for PCE excluding food and energy rose at a 3.7 percent annualized rate after being likewise effectively unchanged a month earlier. Prices for energy goods and services as a whole were up sharply, reflecting a sharp increase in the price index for gasoline and other motor fuel. Food prices were also up for the month.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.9 percent in December, compared with a 0.6 percent rate in November.

Over the six months ending in December, 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 2.4 percent and 2.2 percent, respectively.

The 12-month trimmed mean inflation rate was 1.7 percent in December, unchanged from November. The 12-month inflation rate for headline PCE was 1.3 percent, up from 1.1 percent in November, while the 12-month inflation rate for PCE excluding food and energy was 1.5 percent, up from 1.4 percent a month earlier.

Gasoline Prices Up Sharply

The price index for gasoline and other motor fuel rose 8.3 percent in December after declining 0.4 percent in November. The gasoline and other motor fuels price index alone contributed about 1.5 annualized percentage points to December’s headline inflation rate. Prices for the other major energy components were mixed for the month. The price indexes for fuel oil and electricity services rose 10.0 percent and 0.4 percent, respectively, while the price index for natural gas services fell 0.8 percent. The price index for energy goods and services as a whole rose 4.2 percent, compared with a 0.4 percent increase in November.

The price index for gasoline was down 15.3 percent for the 12 months ending in December; it had been down 19.4 percent for the 12 months ending in November. Compared with December 2019, the price index for fuel oil was down 20.0 percent, while the price indexes for electricity and natural gas were up 2.2 percent and 4.1 percent, respectively. The price index for energy goods and services as a whole was down 7.6 percent over the 12 months.

After December’s sharp increase, the price index for gasoline is likely to show a further gain 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 5.9 percent increase 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 a 0.8 percent increase, making the DOE data consistent with a 5.2 percent increase in the seasonally adjusted gasoline price index. An increase of that magnitude would contribute about 1.0 annualized percentage points to January’s headline inflation rate.

Food Prices Up in December

The price index for food and beverages purchased for off-premises consumption rose at a 2.0 percent annualized rate in December after falling at a 1.7 percent rate in November. Underlying the increase in the aggregate was a sizable increase in the prices of more-processed food items (up an annualized 4.0 percent) that more than offset a decline in the prices of less-processed food items (down an annualized 3.0 percent).

The price index for food as a whole was up 3.9 percent over the 12 months ending in December. The 12-month increase in the aggregate reflects a 5.1 percent increase in the prices of less-processed items and a 3.8 percent increase in the prices of more-processed items.

Prices for Core Goods and Services Rise

Prices for core goods rose an annualized 1.9 percent in December after being effectively unchanged in November.

Among core goods, the price index for prescription drugs (down an annualized 5.3 percent) had the largest negative impact on core inflation, subtracting about 0.2 annualized percentage points from December’s core rate. At the other end of the spectrum, the price index for sporting equipment, supplies, guns and ammunition (up an annualized 53.0 percent) had the largest positive impact, contributing about 0.3 annualized percentage points to December’s core rate.

For the 12 months ending in December, prices for core goods were up 0.1 percent, compared with a 0.2 percent decline through November.

Prices for core services, meanwhile, rose 4.4 percent, annualized, in December after being effectively unchanged in November. Among components experiencing outsized changes, the price index for air transportation (down an annualized 30.9 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 consumption expenditures by nonprofit institutions (up an annualized 35.4 percent) had the largest positive impact among components experiencing outsized changes, contributing about 1.2 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 2.3 percent annualized rate in December, compared with a 0.9 percent rate of increase in November. Individually, the annualized increases were 1.3 percent for rent, 1.5 percent for OER and 5.3 percent for dining out (more formally, “other purchased meals”).

For the 12 months through December, the big three index was up 2.7 percent, down from a 2.8 percent increase for the 12 months through November. The price index for core services as a whole rose 1.9 percent for the 12 months ending in December, identical to its increase for the 12 months through November.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update
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