U.S. Producer Price Index

The official measure of producer prices in the United States is called the Producer Price Index (PPI). It measures average changes in prices received by domestic producers for their output. The PPI was known as the Wholesale Price Index, or WPI, up to 1978. The PPI is one of the oldest continuous systems of statistical data published by the Bureau of Labor Statistics, as well as one of the oldest economic time series compiled by the Federal Government.[1] The origins of the index can be found in an 1891 U.S. Senate resolution authorizing the Senate Committee on Finance to investigate the effects of the tariff laws “upon the imports and exports, the growth, development, production, and prices of agricultural and manufactured articles at home and abroad.”[2]

The PPI for Final Demand is the headline index of the PPI News Release. The PPI for Final Demand measures change in prices received by domestic producers for goods, services, and construction sold for personal consumption, capital investment, government, and export.[3]

Scope of the Producer Price Index

Most of the data is collected through a systematic sampling of producers in manufacturing, mining, and service industries, and is published monthly by the Bureau of Labor Statistics. Virtually every type of mining and manufacturing industry is currently sampled in the PPI; and a majority of service industries are sampled, with more being constantly added.

Data Source

Survey respondents participate voluntarily, and have since the beginning of the PPI. Their cooperation in providing data is essential if the Bureau is to succeed in performing its responsibilities as mandated by Congress. The data provided by respondents to the Bureau is strictly confidential, protected by the CIPSEA law.

Classification

The Producer Price Index family of indexes consists of several classification systems, each with its own structure, history, and uses. However, indexes in all classification systems draw from the same pool of price information provided to the Bureau by cooperating company reporters. The three most important classification structures are industry, commodity, and final demand-intermediate demand (FD-ID). The FD-ID system replaced the stage of processing (SOP) system as the topic of the official PPI News Release in January 2014.[4]

Industry

The PPI for an industry measures the average change in prices received for an industry’s output sold to another industry. For more than 20 years the PPI used the Standard Industrial Classification (SIC) system to collect and publish data. This system received criticism for its inability to adapt to changes in the United States economy. Consequently, the BLS began in January 2004 to publish the PPI data in accordance with the North American Industry Classification System (NAICS). This system was developed in cooperation with Canada and Mexico, and categorizes producers into industries based on the activity in which they are primarily engaged.

Commodity

A PPI from the commodity classification system measures change in prices received for a product or service regardless of industry of origin. It organizes products by similarity, end use, or material composition. This system is unique to the PPI and does not match any other standard coding structure, such as the SIC or the U.N. Standard International Trade Classification (SITC). Historical continuity of index series, the needs of index users, and a variety of ad hoc factors were important in developing the PPI commodity classification.

Final Demand-Intermediate Demand (FD-ID)

FD-ID indexes are made up of PPIs in the commodity system. This system regroups commodity indexes to create aggregate PPIs according to the type of buyer and the amount of physical processing or assembly products have undergone. Over 600 FD-ID PPIs are available measuring price change for goods, services, and construction sold to final demand and intermediate demand. [5] The final demand portion of the FD-ID system measures price change for commodities sold as personal consumption, capital investment, government purchases, and exports. The intermediate demand portion of the FD-ID system tracks price change for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment.[6]

Calculating Index Changes

Movements of price indexes from one month to another usually should be expressed as percent changes, rather than as changes in index points, because the latter are affected by the level of the index in relation to its base period, while the former are not. Each index measures price changes from a reference period defined to equal 100.0. Currently, some PPIs have an index base set at 1982 = 100, while the remainder have an index base that corresponds with the month prior to the month that the index was introduced. BLS measures price change in relation to that figure. An index level of 110, for example, means there has been a 10-percent increase in prices since the base period; similarly, an index level of 90 indicates a 10-percent decrease in prices.

To calculate the percent change in prices between some previous period and a more current period using a PPI, use the following formula

Current period index level - Previous period index level = Index point change
Index point change ÷ Previous period index level = Proportion of change
Proportion of change × 100 = Percent change

For example, in the first quarter of 2016, the PPI for final demand increased 0.5 percent because the index levels were 109.7 in March 2016 and 109.1 in December 2015. The percent change is calculated as

109.7 - 109.1 = 0.6
0.6 ÷ 109.1 = 0.005
0.005 × 100 = 0.5 percent[7]

Core PPI

Many media sources refer to a core PPI, which typically means the headline PPI excluding high volatility items, such as energy. The more volatile components of the PPI for final demand are food, energy, and trade services. PPI makes available indexes which exclude volatility from these components, including Final demand less foods and energy and Final demand less foods, energy, and trade services.[8]

How it differs from CPI

A change in the PPI often anticipates a change in the CPI. However, there are times when the CPI exhibits a change of a significantly different magnitude (or direction) compared to the PPI. This is due to the different definition and uses of the two indices. A primary use of the PPI is to deflate revenue streams in order to measure real growth in output. A primary use of the CPI is to adjust income and expenditure streams for changes in the cost of living. Because of these differences, each uses prices from a different set of commodities and services.[9]

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See also

References
  1. The first 50 years of the Producer Price Index: setting inflation expectations for today. Monthly Labor Review. June 2016. Online at http://www.bls.gov/opub/mlr/2016/article/the-first-50-years-of-the-producer-price-index.htm.
  2. Journal of the Senate, 51st Congress, 2d session (1891), p. 218.
  3. PPI News Release Technical Notes. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/news.release/ppi.tn.htm.
  4. PPI Final Demand-Intermediate Demand Aggregation System. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/ppi/fdidaggregation.htm.
  5. Producer Price Indexes: Program Overview. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/ppi/ppiover.htm.
  6. PPI Final Demand-Intermediate Demand Indexes Summary. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/ppi/fdidsummary.htm.
  7. Producer Price Indexes: Frequently Asked Questions. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/ppi/ppifaq.htm#5.
  8. Frequently Asked Questions on the PPI for Final Demand. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/ppi/fd_faqs.htm.
  9. Comparing the PPI for Personal Consumption with the U.S. All Items CPI for All Urban Consumers. U.S. Bureau of Labor Statistics. Online at http://www.bls.gov/ppi/ppicpippi.htm.
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