Dallas Fed: Expect Robust July PCE Inflation Number

The personal consumption expenditures (PCE) inflation indicator is the indicator most closely watched by Ben Bernanke.  The Dallas Fed is out with a note alerting that the number is going to be "robust". Here's DF's reasoning:

For a second straight month, declines in the price of gasoline exerted a significant drag on the headline PCE inflation rate. The June headline rate came in at an annualized –2.0 percent. Gasoline alone subtracted roughly 3 annualized percentage points, which were partly offset by contributions from food and PCE excluding food and energy. The six-month headline rate dropped to an annualized 3.0 percent, from 3.9 percent a month earlier. The12-month headline rate held steady at 2.6 percent.

As we discuss below, given recent movements in the price of gasoline, we’re not likely to see another weak headline number when data for July are released. On the contrary, we’re apt to see a very robust headline rate in July’s data...

The PCE price index for gasoline fell 6.6 percent in June—not annualized—after falling 2.3 percent in May. Gasoline prices reflect many factors, but the main determinant is the price of crude oil, which fell by about $18 per barrel over May and June. Crude oil’s decline was halted in July, as was the decline in gasoline prices. In the second half of July, gasoline prices began to inch back upward.

According to weekly retail price data from the Department of Energy—of which we now have a full month’s worth—the average price of a gallon of gasoline was down just 0.8 percent in July compared with June. Those DOE data are not seasonally adjusted, and July, in recent years, is a month which features a sharp seasonal decline in prices—the estimate of last July’s seasonal effect is a 6.2 percent decline.

A 0.8 percent decline, when a 6.2 percent decline is typical for the month, translates into a 5.4 percent increase in the seasonally adjusted price, which is relevant for July’s headline PCE rate. Given gasoline’s weight in the PCE—about 4 percent of consumer expenditure—we can expect gasoline alone to contribute about 0.2 monthly percentage points, or about 2.4 annualized percentage points, to July’s headline rate.

Assuming that neither food prices nor prices outside of food and energy show declines, next month’s headline rate will be somewhere north of an annualized 2.4 percent.If, for example, every component apart from gasoline repeats its June performance in July, July’s headline rate will come in at roughly 3.3 percent, annualized...

The July PCE will be released on August 29, 2011, at 8:30 A.M. EDT as part of the Personal Income and Outlays BEA statement.