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Behind the Numbers: PCE Inflation Update, July 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 5.1 percent in July after increasing an annualized 6.6 percent in June. The price index for PCE excluding food and energy rose at a 4.1 percent annualized rate after increasing an annualized 5.8 percent a month earlier. Prices for energy goods and services rose, and food prices posted another robust increase.

The Dallas Fed’s Trimmed Mean PCE inflation rate was an annualized 3.2 percent in July, compared with a 2.4 percent rate in June.

Over the six months ending in July, the trimmed mean averaged an annualized 2.6 percent rate of increase. Over the same period, the headline and core indexes averaged annualized rates of 5.9 percent and 5.3 percent, respectively.

The 12-month trimmed mean inflation rate was 2.0 percent in July, unchanged from June. The 12-month inflation rate for headline PCE was 4.2 percent, up from 4.0 percent in June, while the 12-month inflation rate for PCE excluding food and energy was steady at 3.6.

Energy Prices Rise

The price index for gasoline and other motor fuel rose a seasonally adjusted 2.4 percent in July after rising 2.5 percent in June. Prices for the other major energy components also rose, with the price indexes for electricity and natural gas rising 0.4 percent and 2.2 percent, respectively, and the price index for fuel oil rising 0.6 percent. The price index for energy goods and services as a whole rose 1.6 percent in July after rising 1.5 percent in June.

The price index for gasoline was up 41.6 percent for the 12 months ending in July; it had been up 44.8 percent for the 12 months ending in June. Compared with July 2020, the price index for fuel oil was up 39.1 percent, while the price indexes for electricity and natural gas were up 4.0 percent and 19.0 percent, respectively. The price index for energy goods and services as a whole was up 23.6 percent over the 12 months.

After July’s 2.4 percent increase, the price index for gasoline is likely to show a slightly larger 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 0.9 percent increase in August before seasonal adjustment. The typical seasonal pattern for August—what we would expect given normal changes in supply-and-demand conditions—amounts to a roughly 2.1 percent price decline, making the DOE data consistent with a 3.0 percent increase in the seasonally adjusted gasoline price index. An increase of that magnitude would contribute about 0.7 annualized percentage points to August’s headline inflation rate.

Food Prices Rise Sharply Again

The price index for food and beverages purchased for off-premises consumption rose at a 7.9 percent annualized rate in July after rising at a 9.4 percent rate in June. The large jump in the aggregate reflects similar-sized increases in the prices of both less-processed food items (up an annualized 7.2 percent) and more-processed food items (up an annualized 8.2 percent).

The price index for food as a whole was up 2.4 percent over the 12 months ending in July. The 12-month increase in the aggregate reflects a 5.0 percent rise in the prices of less-processed items and a 1.4 percent increase in the prices of more-processed items.

Prices for Core Goods, Services Up Strongly

Prices for core goods rose an annualized 3.2 percent in July after increasing an annualized 7.2 percent in June.

Among core goods, the price index for household linens (down an annualized 28.0 percent) had the largest negative impact, subtracting about 0.1 annualized percentage points from July’s core rate. At the other end of the spectrum, the price index for new light trucks (up an annualized 21.7 percent) had the largest positive impact, contributing about 0.5 annualized percentage point to July’s core rate. Notably, the price indexes for used cars and light trucks, which had made substantial positive contributions to core inflation the past few months, both declined in July.

For the 12 months ending in July, prices for core goods were up 4.0 percent, compared with a 4.3 percent increase through June.

Prices for core services, meanwhile, rose an annualized 4.5 percent in July after increasing an annualized 5.3 percent in June. Among components experiencing outsized changes, the price index for financial service charges, fees and commissions (down an annualized 5.4 percent) had the biggest negative impact on ex-food-and-energy inflation, subtracting around 0.2 annualized percentage points from July’s core rate. The price index for hotels and motels (up an annualized 119.1 percent) had the largest positive impact among components experiencing outsized changes, contributing about 0.6 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 4.9 percent annualized rate in July, identical to its increase in June. Individually, the annualized increases were 1.9 percent for rent, 3.5 percent for OER and 10.2 percent for dining out (more formally, “other purchased meals”).

For the 12 months through July, the big three index was up 3.1 percent, compared with a 2.9 percent increase for the 12 months through June. The price index for core services as a whole rose 3.5 percent for the 12 months ending in July, compared with a 3.3 percent increase for the 12 months through June.

Trimmed Mean PCE Inflation Rate
Trimmed Mean PCE
PCE Inflation Update
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