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Posts tagged with: "PCEPI"

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The high(er) price of health

Our purchases cost more and more over time, given inflation. Tracking the price index for personal consumption expenditures is one way to measure inflation. And the FRED graph above shows that, since 2000, personal consumption expenditures (purple line) have become 40% more expensive. This amounts to an annual rate of inflation of about 1.8%.

Price indexes can be computed for specific spending categories as well—such as food, energy, and health. The Health Expenditures Price index is also shown in this graph (blue line): It’s the way the Bureau of Economic Analysis tracks the price of heath expenditures for households.

The graph reveals how much faster the price of health expenditures is growing relative to the price of general consumption expenditures: It took 19 years for general consumption expenditures to become 40% more expensive, while it took only 7 years for health expenditures to do that. So, the inflation rate for health expenditures is much higher: 3.7% per year.

How this graph was created: On FRED’s main page, search for “Personal Consumption Expenditures”; find and select “Personal Consumption Expenditures: Chain-Type Price Index.” Use the “Edit Graph” menu’s “Add Line” option to search for “Blended” and select “Health Expenditures Price Index, Blended Account Basis.” Click on “Add data series.” In the Units box, choose “Index (Scale value to 100 for chosen date)” and choose the year 2000. Then click “Copy to all.” Return to the graph and restrict the view to 2000-01-01 to 2020-01-01.

Suggested by Guillaume Vandenbroucke.

View on FRED, series used in this post: HLTHSCPIBLEND, PCEPI

Measuring inflation trends

Why use different inflation measures for policy analysis?

Congress has instructed the Federal Reserve to pursue monetary policies that promote maximum employment and price stability. The Federal Open Market Committee (FOMC) has determined that “inflation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures [PCE], is most consistent over the longer run with the Federal Reserve’s statutory mandate” for price stability. As of March 2018, the year-over-year percent change in the PCE was 2.01 percent, or just 1 basis point above the FOMC’s 2 percent target. However, inflation was substantially lower over much of the past year—as low as 1.40 percent in July 2017—and economists were uncertain whether the low readings reflected temporary factors that would soon dissipate or an underlying inflation rate that was below the level consistent with price stability.

Because the inflation rate measured by the headline PCE tends to be volatile from month to month, many observers monitor other measures, such as the PCE excluding food and energy prices (“core PCE”), to gauge underlying inflation trends. The near-term growth in core PCE is among the economic variables that the FOMC includes in its quarterly Summary of Economic Projections. As of March 2018, the year-over-year growth in core PCE was 1.88 percent. Some critics argue that this measure of inflation is “rotten,” however, because it arbitrarily excludes particular categories of goods whose prices affect the cost of living.

An alternative, and somewhat less arbitrary, measure of underlying inflation trends is based on the mean of changes in the prices of the individual goods and services that make up the price index after dropping items with exceptionally large or exceptionally small price changes in a given month. For example, the Federal Reserve Bank of Dallas calculates a trimmed mean PCE inflation measure designed to hew closely to the trend in overall PCE inflation. By omitting price changes for goods and services having the largest or smallest price movements in a given month, extreme values have less impact on the measured inflation rate, which arguably is a better measure of underlying inflation trends than the traditional core measure.

The graph shows the data at the time of this writing: It plots the headline, core, and Dallas Fed trimmed mean PCE inflation rates, measured as percent changes over the past 12 months, for the past year. Whereas the headline PCE inflation rate increased from 1.73 percent in February to 2.01 percent in March, and the core rate rose from 1.57 percent to 1.88 percent, the trimmed mean rose only from 1.71 percent to 1.77 percent. Hence, in contrast with the headline and core measures, the trimmed mean indicates little, if any, change in underlying inflation pressures in recent months, suggesting that low inflation readings might be more reflective of underlying trends than temporary special factors.

How this graph was created: Search for “PCE,” check the three series, and click on “Add to Graph.” From the “Edit Graph” menu, change the units to “Percent Change from Year Ago.” Change the frequency to “Monthly” and the starting date to “2017-03-01.”

Suggested by David Wheelock.

View on FRED, series used in this post: PCEPI, PCEPILFE, PCETRIM12M159SFRBDAL

The trouble with food and energy

There are many ways to measure inflation. One popular method used for monetary policy purposes is to look at the price index for personal consumption expenditures excluding food and energy. Why exclude food and energy? Aren’t those important items that matter a great deal to households? The reason is straightforward: These price categories are considered to be excessively volatile, and including them would make it more difficult for policymakers to pin down the inflation trend. The graph above makes this point visually by comparing the PCE inflation rates with and without food and energy.

Usually when you add items to an index, you reduce the volatility of that index. This same premise is at work when you add assets to an investment portfolio—i.e., when you diversify to reduce volatility. But this does not happen when the item you add is excessively volatile. And, again, food and energy are excessively volatile. Food is subject to large price variations due to external shocks, mostly on the supply side, such as weather. Energy is subject to shocks as well: supply shocks such as discoveries, wars, political risk, and infrastructure issues and demand shocks such as climate events. This happens with food and energy much more than it does for other items included in personal consumption expenditures.

How this graph was created: Search for “PCE.” Then go to the “Filter Series by Tags” box to the left and enter “price index.” Select the first two monthly series that appear and add them to the graph. Change the units for both series to “Percent Change From Year Ago.”

Suggested by Christian Zimmermann

View on FRED, series used in this post: PCEPI, PCEPILFE


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