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Behind the Numbers: PCE Inflation Update, January 2021

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 4.2 percent in January after rising an annualized 4.5 percent in December. The price index for PCE excluding food and energy rose at a 3.1 percent annualized rate after rising an annualized 3.7 percent a month earlier. Prices for energy goods and services as a whole were up sharply, reflecting a steep increase in the price index for gasoline and other motor fuel. Food prices were down for the month.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 1.9 percent in January, compared with a 1.8 percent rate in December.

Over the six months ending in January, the trimmed mean averaged an annualized 1.5 percent rate of increase. Over the same period, the headline and core indexes averaged annualized rates of 2.5 percent and 2.1 percent, respectively.

The 12-month trimmed mean inflation rate was 1.7 percent in January, down from a revised 1.8 percent in December. The 12-month inflation rate for headline PCE was 1.5 percent, up from 1.3 percent in December, 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 Rise Sharply

The price index for gasoline and other motor fuel rose 7.4 percent in January after rising 5.2 percent in December. The gasoline and other motor fuels price index alone contributed about 1.5 annualized percentage points to January’s headline inflation rate. Prices for the other major energy components were mixed for the month. The price index for fuel oil rose 5.4 percent, while the price indexes for electricity and natural gas fell 0.2 percent and 0.4 percent, respectively. The price index for energy goods and services as a whole rose 3.5 percent, compared with a 2.7 percent increase in December.

The price index for gasoline was down 8.4 percent for the 12 months ending in January; it had been down 16.0 percent for the 12 months ending in December. Compared with January 2019, the price index for fuel oil was down 14.5 percent, while the price indexes for electricity and natural gas were up 0.7 percent and 4.1 percent, respectively. The price index for energy goods and services as a whole was down 4.5 percent over the 12 months.

After January’s sharp increase, the price index for gasoline is likely to show a further sharp gain 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 6.9 percent increase 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 a 0.4 percent increase, making the DOE data consistent with a 6.5 percent increase in the seasonally adjusted gasoline price index. An increase of that magnitude would contribute about 1.2 annualized percentage points to February’s headline inflation rate.

Food Prices Down in January

The price index for food and beverages purchased for off-premises consumption fell at a 0.9 percent annualized rate in January after rising at a 1.8 percent rate in December. Underlying the decrease in the aggregate was a drop in the prices of more-processed food items (down an annualized 2.0 percent) that more than offset a rise in the prices of less-processed food items (up an annualized 2.0 percent).

The price index for food as a whole was up 3.6 percent over the 12 months ending in January. The 12-month increase in the aggregate reflects a 4.3 percent increase in the prices of less-processed items and a 3.3 percent increase in the prices of more-processed items.

Prices for Core Goods and Services Rise

Prices for core goods rose an annualized 5.3 percent in January after rising an annualized 0.8 percent in December.

Among core goods, the price index for prescription drugs (down an annualized 6.2 percent) had the largest negative impact on core inflation, subtracting about 0.3 annualized percentage points from January’s core rate. At the other end of the spectrum, the price index for women’s and girls’ clothing (up an annualized 43.6 percent) had the largest positive impact, contributing about 0.5 annualized percentage points to January’s core rate.

For the 12 months ending in January, prices for core goods were up 0.4 percent, compared with no change through December.

Prices for core services, meanwhile, rose 2.2 percent, annualized, in January after rising an annualized 4.7 percent in December. Among components experiencing outsized changes, the price index for consumption expenditures by nonprofit institutions (down an annualized 29.3 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 1.4 annualized percentage points from January’s core rate. The price index for physician services (up an annualized 29.5 percent) had the largest positive impact among components experiencing outsized changes, contributing about 1.1 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 2.5 percent annualized rate in January, compared with a 2.4 percent rate of increase in December. Individually, the annualized increases were 1.3 percent for rent, 1.7 percent for OER and 6.1 percent for dining out (more formally, “other purchased meals”).

For the 12 months through January, the big three index was up 2.6 percent, down from a 2.7 percent increase for the 12 months through December. The price index for core services as a whole rose 1.9 percent for the 12 months ending in January, identical to its increase for the 12 months through December.

 

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update
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