Producer prices, part 1

1. Business Statistics and Registers Producer prices, part 1 Introduction

2. Concepts • A Producer Price Index (PPI) provides a weighted average of the price changes in a group of products between one time period and another • For an index to provide information on price changes, at least two index numbers from the same series need to be available, and these index numbers must relate to the same basket of goods • There is no unique PPI, since the prices of different combinations of goods and services do not all change at the same rate • Because price changes can vary considerably from product to product, the value of the price index will be dependent on the precise set of goods and services selected

3. Use of PPI The PPI has the following main uses:

4. Indexation of contracts • Indexation of contracts involves adjustment to the value of monetary amounts based on the increase or decrease in the level of a price index to take the inflationary risk out of the contract • Indexation n is common in long-term contracts, e.g. in construction and aircraft production • It is important that parties understand the exact makeup of the index to ensure that it is suitable for the purpose

5. National accounts deflator • A vital use of the PPIs is as a deflator of production volumes in the national accounts • For deflation of national accounts, current-weighted indices and fine aggregations are required • Paasche price indices would be ideal • Many countries use chain-linked indices as an alternative

6. Basic price and producer price The basic price is the amount receivable by the producer from the purchaser for a unit of a good or service • Basic prices are output minus any tax payable, and plus any subsidy receivable, and exclude any transport charges invoiced separately • The producer’s price is the amount receivable by the producer from the purchaser for a unit of a good or service, minus any VAT or similar deductible tax, invoiced to the purchaser, and excluding transport charges The difference between basic and producer prices is generally the per unit subsidy that the producer receives and taxes on production • Basic prices are preferred in the PPI • In most cases basic and producer prices will be the same

7. Short term inflation indicator • Monthly or quarterly PPI with detailed product and industry data allows short-term price inflation to be monitored • Models analyze price pressures that different sectors of the economy are facing

8. Inflationary pressures

9. Output prices • Output prices are the basic prices received by the producer • An output price index measures the average price change of all covered goods and services resulting from an activity • PPI prices should be actual transaction prices, which can be directly recorded • The price should be recorded at the time when the transaction occurs • Intercompany transfer prices should be used with caution

10. Input prices • Input price indices measure the change in the prices of all intermediate inputs used in production • An input PPI measures changes in the cost of the basket of purchases required as inputs into the production process, excluding primary inputs like land, labor, or capital

11. Export/import prices • Export and import prices are an important extension of domestic PPIs • They are used in the deflation of external trade • Import prices feed into the producer input index, since these are an important contribution to producer costs • It is difficult to collect these price data from establishments • Price and quantity data on imports and exports are therefore collected by other surveys

12. Wholesale prices • The Wholesale Prince Index (WPI) is the precursor of the PPI • The WPI was a measure of price changes one stage prior to final demand • The WPI differs from the PPI because it includes both domestically produced products and imported products (excluded from the PPI), while excluding prices of exported products

13. Taxes • Taxes on products are generally excluded from PPIs because these are usually deductible as an expense by businesses • Taxes such as excise duty on imports are sometimes included • Change in taxes may change prices • It is possible to produce ex-tax/ex-duty indices

14. Coverage • Most PPIs measure price change for the goods producing sectors of the domestic economy, includ. agriculture, forestry, and fishing; mining; manufacturing; and public utilities • The construction sector has generally not been considered a component of the traditional goods-based PPI • The services sectors that are in scope for a PPI vary across countries • Many countries are interested in creating a corporate services price index • A more expansive definition could include all services transactions that are in intermediate demand

15. Price coverage • The appropriate price to obtain from a theoretical perspective should be the price at the time there is a change in ownership • It is difficult to adhere to this in practice • Therefore, shipment price are often used • In most circumstances the shipment price is final at the time of delivery to the customer

16. Net transaction prices • Net transaction prices are actual shipment prices received by the producer for the sales transaction • The price includes the impact of all discounts, surcharges, rebates, etc. for a unique customer or unique class of customer • Different types of prices meet the definition of the net transaction price closely: particularly order prices

17. Order prices • Order prices refer to the price quoted at the time the customer places an order • There usually will not be any difference between order and shipment prices • For goods with an extended production process other solutions must be used

18. Role of weights • The PPI is calculated from many prices collected from all types of establishments • The collected prices are first combined to compile indices for each individual product • Because some products have greater production or sales than others, each product is given a weight to represent its importance in total output or sales • To arrive at the aggregate index figure, the price relatives of the individual products are multiplied by these weights to derive a weighted average aggregate index • Weights are key elements in the construction of a PPI

19. Value weights • The best approach would be to have value of production weights at basic prices for all levels of index aggregation • Since the PPI can also be used to measure the change in intermediate input prices, the value weights for the input index would be the cost of the input products to the producer • The value weight multiplied by the long-term price relative provides the estimate of what it would cost at today’s prices to produce the quantity of product in the price reference period.

20. Quantity weights • The use of quantity weights is appropriate as long as the same specific product was produced as in the base period, that is, there is no qualitative difference between the current product produced and the base-period product • Quantity weights are feasible only at the detailed product level • At higher levels of aggregation, such as at the product group level or industry level, a value aggregate is more appropriate

21. Classification of goods • The classification scheme of goods and services in the PPI should follow the Central Product Classification • In terms of economic activities, the establishments should be classified using ISIC, Revision 4