Bureau of Labor Statistics.
Notice of solicitation of comments.
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.
Written comments must be submitted to the office listed in the
Send comments to Jonathan Weinhagen, Producer Price Index, Bureau of Labor Statistics, Room 3650, 2 Massachusetts Avenue, NE., Washington, DC 20212 or by
Jonathan Weinhagen, Producer Price Index, Bureau of Labor Statistics, telephone number 202–691–7709 (this is not a toll-free number), or by
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.
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 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.
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).
For further information about the new PPI experimental aggregation system, please visit
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.