Comment Request

AGENCY:

Bureau of Labor Statistics.

ACTION:

Notice of solicitation of comments.

SUMMARY:

To expand the scope of coverage for the Producer Price Index (PPI), BLS recently developed an experimental aggregation system that includes price changes for goods, services, and construction sold to all portions of final demand and intermediate demand.

DATES:

Written comments must be submitted to the office listed in the ADDRESSES section of this notice on or before July 18, 2011.

ADDRESSES:

Send comments to Jonathan Weinhagen, Producer Price Index, Bureau of Labor Statistics, Room 3650, 2 Massachusetts Avenue, NE., Washington, DC 20212 or by e-mail to: weinhagen.jonathan@bls.gov.

FOR FURTHER INFORMATION CONTACT:

Jonathan Weinhagen, Producer Price Index, Bureau of Labor Statistics, telephone number 202-691-7709 (this is not a toll-free number), or by e-mail to: weinhagen.jonathan@bls.gov.

SUPPLEMENTARY INFORMATION:

I. Background

Currently, the Bureau of Labor Statistics (BLS) uses the stage-of-processing (SOP) system as the key structure for analyzing producer prices. This system aggregates commodity price indexes for processed and unprocessed goods and is organized into three stages: Finished goods, intermediate goods, and crude materials for further processing. Over the past 20 years, the BLS has expanded Producer Price Index (PPI) coverage to include price indexes for many service and construction activities, but the SOP system continues to include only goods indexes. The PPI program recently developed an experimental aggregation system that includes goods price indexes as well as service and construction price indexes for products sold to all portions of final demand (personal consumption, capital investment, government use, and export) and to intermediate demand (business inputs, excluding capital investment). The experimental aggregation system was introduced with the release of January 2011 data in February 2011. This new system is a model that greatly expands PPI coverage of the United States economy.

In developing the experimental aggregation system, two main criteria were considered. First, the system should be designed in such a way as to alleviate or minimize problems resulting from multiple counting. Second, the system should be analytically useful. Multiple counting can lead to overstated or understated measures of inflation. Multiple counting occurs when the price for a specific commodity and the inputs to production for that same commodity are included in an aggregate index. Before 1978, for example, the PPI program highlighted the all commodities index as its primary aggregate index. This index aggregates prices for all goods sold in the economy, using weights that reflect sales to all portions of intermediate and final demand. The all commodities index was the subject of serious criticism when petroleum prices spiked in the 1970s. Price change, as measured by the all commodities index, was seen as exaggerated because the index included both gasoline sold for final demand and crude petroleum, the primary input used in the production of gasoline. The SOP system substantially reduced multiple counting by separating goods into three stages: Crude, intermediate, and finished.

The second criterion is that the aggregation system be analytically useful. The SOP system is more analytically useful than the all commodities index, as the system potentially allows price changes to be tracked through the various segments of the economy. In developing an aggregation system that incorporates prices for services and construction, the possible analytical functions of the system were considered.

The new PPI aggregation system was designed to satisfy the two criteria identified earlier. To avoid multiple counting, the system separates final-demand transactions from intermediate-demand transactions and, in some cases, voids instances of multiple counting. One of the reasons the system is useful for analysis is that it combines commodity indexes into meaningful final-demand and intermediate-demand aggregates. The aggregates convey information about the types of commodities contributing to inflation at both the final demand level and at earlier stages of production, and can be used to track price change through the economy.

II. Final Demand

The final demand segment of the PPI experimental aggregation system tracks price change for commodities—goods, services, and construction—sold by producers to all portions of final demand (personal consumption, capital investment, government, and export). The final demand segment of the experimental aggregation system is composed of six main price indexes: Final demand goods, final demand construction, final demand transportation services, final demand trade services, final demand traditional services, and overall final demand. The experimental final demand goods index measures price change for both unprocessed and processed goods sold to final demand. Fresh fruits sold to consumers or computers sold as exports are examples of transactions included in this index. The final demand construction index tracks price change for new construction as well as maintenance and repair construction sold to final demand. Construction of office buildings is an example of a commodity in this index. The final demand transportation services index tracks price change for transportation of passengers and cargo sold to final demand and includes prices for warehousing and storage of goods sold to final demand. The final demand trade services index measures price change for the retailing and wholesaling of merchandise sold to final demand, generally without transformation. The final demand traditional services index tracks price change for services other than trade and transportation services sold to final demand. Publishing, banking, lodging, and health care are examples of traditional services in the index. The overall final demand index tracks price change for all types of commodities sold to final demand and is constructed by combining the five final demand indexes described above.

III. Intermediate Demand

The intermediate demand portion of the PPI experimental aggregation system tracks price change for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. In order to meet the needs of different data users, the experimental aggregation system includes two separate treatments of intermediate demand. The first treatment organizes intermediate-demand commodities by commodity type and is structurally similar to the final demand portion of the system. The second approach organizes intermediate demand commodities into stages by production flow with the explicit goal of developing a forward flow model of production and price change.

Intermediate-demand-by-commodity-type. The intermediate-demand-by-commodity-type portion of the experimental aggregation system organizes indexes for commodities sold to businesses, where types include goods, services, and maintenance and repair construction. The system is composed of six main price indexes: Unprocessed goods for intermediate demand, processed goods for intermediate demand, intermediate demand construction, intermediate demand transportation services, intermediate demand trade services, and intermediate demand traditional services. The unprocessed-goods-for-intermediate-demand price index measures price change for goods that have undergone no fabrication and will be sold to businesses as inputs to production. Crude petroleum sold to refineries is an example of an unprocessed good sold to intermediate demand. The processed-goods-for-intermediate-demand index tracks price change for fabricated goods sold as business inputs. Examples include car parts sold to car manufacturers and gasoline sold to trucking companies. The intermediate demand construction index measures price change for construction purchased by firms as inputs to production. Because new construction is categorized in the final demand portion of the economy, this index tracks price change for maintenance and repair construction purchased by firms. The intermediate demand transportation services indexes measure price change for business travel as well as transportation and warehousing of cargo sold to intermediate demand. The index for intermediate trade services measures price change in the service of retailing or wholesaling goods purchased by businesses as inputs to production. Finally, the intermediate traditional services price index tracks price change in traditional services purchased by firms as inputs to production. Legal and accounting services purchased by businesses are examples of intermediate traditional services. The system does not include an overall intermediate demand index since this index would have severe multiple counting problems.

Intermediate-demand-by-production-flow. The production flow treatment of intermediate demand within the experimental aggregation system is a stage-based system of price indexes. The stage-based indexes can be used to study price transmission relationships between intermediate-demand stages, and to final demand. The production flow treatment contains four main indexes: Intermediate-demand stages 1 through 4.

A four-step process was used by the PPI program to develop the intermediate-demand-by-production-flow system. The first step in the process of developing stages was to determine the total production of each industry in the economy. In general, industries are classified as primary producers of specific goods or services; however, industries may also be secondary producers of other goods or services. The first step therefore requires determining both the primary production and secondary production of each industry in the economy. The 2002 BEA “Make of Commodities by Industries” table was used for this purpose.

The second step in developing stages was to ascertain where the total output of each industry is consumed. This step requires determining, for each industry, the portion of the industry output consumed as final demand and the portion consumed as intermediate demand. For the intermediate-demand portion, determining which specific industries are consuming the industry's output also is required. BEA 2002 “Use of Commodities by Industry” data were employed to make this determination.

The third step in developing stages was to assign industries to stages of production. The PPI program chose the criterion of maximizing net forward flow within the system to assign industries to stages. Net forward flow is defined as (forward shipments of the industry stage + inputs received from previous stages of process)—(backward shipments of the industry stage + inputs received from forward stages of process).

The PPI program implemented a two-step procedure to attempt to maximize net forward flow. In the first step, a set of rules was used to assign industries to stages and select the appropriate number of stages for the system. The system that the PPI program eventually chose is a four-stage system. The set of rules used to assign industries to the four stages is summarized as follows:

• Assign industry to stage 4 if shipments sold to final demand ≥75 percent of industry production.
• Assign industry to stage 3 if shipments sold to final demand and to stage 4 ≥65 percent of industry production and shipments sold to final demand <75 percent of production.
• Assign industry to stage 2 if shipments sold to final demand, to stage 4, and to stage 3 ≥65 percent of industry production; and shipments sold to final demand and to stage 4 <65 percent of production; and shipments sold to final demand <75 percent.
• Assign industry to stage 1 if it does not meet the conditions of stage 4, 3, or 2.

Before selecting the number of stages and set of rules just described, the PPI program examined many different sets of rules and numbers of stages. It eventually chose the aforementioned system because it performed very well in terms of maximizing net forward flow and minimizing internal flow (shipments produces and consumed in the same stage of production).

After the assignment of industries to stages by use of the aforementioned rules, the second step in the procedure to maximize net forward flow was to examine the effects on net forward flow of moving individual industries to stages to which they were not originally assigned. In cases in which there were substantial gains to net forward flow industries were left in the new stage.

The PPI production-flow-based system exhibits strong forward flow and little backflow. After weighting, 83.6 percent of transactions in the system are forward flowing, 5.7 percent are back flowing, and 10.7 percent are internally flowing.

The final step in constructing stages for the production-flow-based intermediate demand indexes was to determine the commodities to be included and weights to be used in the intermediate demand indexes. It is important to understand that these indexes track prices for inputs consumed by industries in each of the four stages of production, as opposed to prices for the output produced by industries in each of the four stages of production. These indexes also exclude prices for inputs both produced and consumed within an industry production stage, thereby eliminating any multiple counting of price change. The fourth intermediate demand index, for example, tracks price change for inputs consumed, but not produced, by industries included in the fourth stage of production. Recall that industries classified in the fourth stage of production mostly produce goods sold to final demand. The stage 4 intermediate demand index therefore measures price change in the inputs to production of industries that produce primarily final-demand goods (stage 4 producers).

IV. Further Information

For further information about the new PPI experimental aggregation system, please visit http://www.bls.gov/ppi/experimentalaggregation.htm. The experimental aggregation Web page contains information on relative importance figures for categories, various methodological articles from the Monthly Labor Review and PPI Detailed Report, a table showing the industry stage assignments in intermediate demand by production flow, a list of areas of non-coverage, and instructions for obtaining time series data.

V. Desired Focus of Comments

Comments and recommendations are requested from the public on the new PPI experimental aggregation system. The concepts, methods, and definitions described here may change based on input from the public and experience gained in data collection.

The BLS welcomes comments on any aspect of the experimental aggregation system but is especially interested in comments on:

1. The inclusion of the weight for government purchases and exports in the new system.

2. The usefulness of the new experimental aggregation system, including either or both treatments of intermediate demand—intermediate-demand by production flow and intermediate demand by commodity type.

3. The criterion of maximizing net forward flow to develop the intermediate demand by production flow segment of the experimental aggregation system.

4. The usefulness of the commodity groupings. The final demand and intermediate demand by commodity type portion of the experimental aggregation system group price indexes by type of commodities, where commodity types include unprocessed goods, processed goods, traditional services, transportation services, trade services, and construction.