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The Producer Price Index (PPI) Measures Average

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The Producer Price Index (PPI) Measures Average Chapter 14 Producer Prices he Producer Price Index (PPI) measures average changes in prices received by domestic producers for IN THIS CHAPTER Ttheir output. Most of the information used in calculat- ing producer price indexes is obtained through the system- atic sampling of industries. In the mining and manufacturing Background ................................................................ 1 sectors, price information from virtually every industry is Description of Survey ................................................. 2 captured. By contrast, although PPI coverage of the service Universe ................................................................. 2 sector of the economy is substantial (more than 70 percent), it Prices ...................................................................... 2 remains incomplete. The PPI program also includes data that Product change and quality adjustment ................. 3 track other sectors of the economy: agriculture, fishing, for- Classification .......................................................... 4 estry, utilities (natural gas and electricity), and construction. Data sources and collection methods ......................... 7 As of January 2014, the PPI program included the follow- Data processing .......................................................... 8 ing indexes: Estimating Procedures ............................................... 9 Index calculation .................................................... 9 • Price indexes for approximately 535 mining, forestry, Weights ................................................................... 9 utility, construction, manufacturing, and services industries; Missing prices ........................................................ 10 over 500 indexes for groupings of industries; and more than Rounding policy ..................................................... 10 4,000 indexes for specific within-industry product and ser- Seasonal adjustment ............................................... 10 vice categories; Analysis and Presentation .......................................... 11 Analysis .................................................................. 11 • More than 3,700 commodity price indexes for goods Presentation ............................................................ 12 and about 800 for services (seasonally adjusted and not sea- Uses and Limitations .................................................. 14 sonally adjusted), organized by product, service, and end use; Economic indicator ................................................ 14 • Over 600 indexes for aggregate measures of price Deflator .................................................................. 15 change, including the aggregation system for final demand– Private business uses .............................................. 15 intermediate demand (FD–ID). Discontinued data ................................................... 15 Technical References ................................................. 16 Together, these elements constitute a system of price mea- sures designed to meet the need for both aggregate informa- tion and detailed applications, such as following price trends of the index can be found in an 1891 U.S. Senate resolution for specific industries and products, as well as the need for authorizing the Senate Committee on Finance to investigate tracking price movements at a more aggregated level relative the effects of tariff laws “upon the imports and exports, the to the overall economy. growth, development, production, and prices of agricultural and manufactured articles at home and abroad.”1 Background The first index published, with its base period 1890–99, was an unweighted average of price relatives for about 250 Known until 1978 as the Wholesale Price Index, or WPI, the commodities. Since that time, many changes have been made PPI is one of the oldest continuous systems of statistical data published by the Bureau of Labor Statistics (BLS), as well 1 as one of the oldest economic time series compiled by the Senate Committee on Finance, Wholesale Prices, Wages, and Trans- portation, Senate Report No. 1394, “The Aldrich Report,” Part I, 52nd Con- federal government. When it was first published in 1902, the gress, 2d sess., March 3, 1893; and U.S. Department of Labor, Course of index covered the years from 1890 through 1901. The origins Wholesale Prices, 1890–1901, Bulletin No. 39, March 1902, pp. 205–09. 1 in the sample of commodities, the base period, and the meth- allocated substantial resources toward expanding its cover- od of calculating the index. For example, a system of weight- age of the services and construction sectors. With the release ing was first used in 1914, and major expansions of the sam- of PPI data for January 2004, the PPI program replaced the ple and reclassifications were implemented in 1952 and 1967. SIC with the North American Industry Classification System The PPI program’s original intent was to measure changes (NAICS). in prices received for goods sold in primary markets of this Culminating the longstanding PPI objective to expand country. The conceptual framework and economic theory coverage, in January 2014 the PPI transitioned to the FD–ID guiding the program’s evolution, though more implicit than aggregation system from the SOP model. By incorporating explicit, concentrated on obtaining the price received by ei- indexes for services, construction, government purchases, ther a domestic producer or an importer for the first commer- and exports, and by more than doubling PPI coverage of the cial transaction. U.S. economy to over 75 percent of in-scope domestic pro- A major limitation of the original methodology was its re- duction in its primary aggregation system, the FD–ID model liance on judgmental sampling of commodities and produc- improves upon the SOP system that preceded it. ers; that is, commodities and producers were selected without the use of probability-based statistical methods. This prac- Description of Survey tice resulted in a system that was too heavily composed of volume-selling products made by larger firms. As a result, Universe the PPI did not adequately reflect the behavior of the multi- The PPI universe consists of the output of all industries in tude of products whose individual transaction values might the goods-producing sectors of the U.S. economy—mining, have been small, but that collectively accounted for a siz- manufacturing, agriculture, fishing, and forestry—as well as able portion of the economy. Another result of judgment- the output of the natural gas, electricity, and construction in- based sampling was that the output of many industries was dustries. Recycled goods that compete with those made in the completely overlooked. Before the transition to the current goods-producing sectors, such as waste and scrap materials, probability-based statistical method, which began in the late also are outputs that are part of the survey. Imports no lon- 1970s, products covered by the PPI program accounted for ger are included within the PPI universe; however, the BLS only about half of the total value of output from the mining International Price Program publishes price indexes for both and manufacturing sectors. The practice of assigning equal imports and exports. (See chapter 15.) Goods shipped be- weight to price reports from each producer of a given com- tween establishments owned by the same company (termed modity, regardless of any disparity in size among these firms, interplant or intracompany transfers) are included, as is a may have caused additional distortions. substantial percentage of the domestic production of goods Another limitation of the earlier methodology was its specifically made for the military. commodity orientation, which, although important, was not The output of the services sector and other sectors that compatible with the industry orientation of most other federal do not produce physical products also is conceptually within economic time series. The PPI’s unique commodity classifi- the PPI universe. As of January 2014, the PPI program cov- cation scheme made it difficult to compare producer price ered more than 70 percent of the service sector’s output, pub- movements with data for most other economic variables, lishing data for selected industries in the following sectors: which at that time were expressed in terms of the Standard wholesale and retail trade; transportation and warehousing; Industrial Classification (SIC). information; finance and insurance; real estate brokering, These and other weaknesses in the PPI program, combined rental, and leasing; professional, scientific, and technical ser- with increased development of the theory of price indexes vices; administrative, support, and waste management ser- in preretail markets, spurred several changes in terminology vices; health care and social assistance; and accommodation. and operations during the 1970s. The 1978 change in the pro- For the construction sector, selected indexes for nonresiden- gram name from Wholesale Price Index to Producer Price tial construction industries, maintenance and repair construc- Index, for example, was intended to reemphasize the fact that tion, and nonresidential construction contractor services also the PPI program was based on prices received by producers are published. of goods and services from whoever made the purchase. Also in 1978, the new nomenclature was accompanied by a shift Prices in the analytical focus from the All Commodities Price Index
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