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International practices for business price index calculation

1. Introduction

Statistics New Zealand is progressively redeveloping a suite of business price indexes (BPIs) comprising the Producers Price Index (PPI), Farm Expenses Price Index (FEPI) and Capital Goods Price Index (CGPI).

As part of the redevelopment, New Zealand practice for various aspects of BPI compilation has been compared with the practices of five other Organisation for Economic Co-operation and Development (OECD) countries.

This article looks at how BPIs are calculated in New Zealand and in the five other countries.

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2. International practice

For international comparison, Statistics NZ selected five OECD countries representing Europe, North America, Asia and Australasia: the United Kingdom, Australia, Canada, the United States, and Japan. They were selected because of the reputation of their economic statistics and availability of comprehensive documentation in English. The sources used for this article (see the references section) are available to the public and may not reflect the most current developments in those countries.

It is worth noting that each of these nations have much larger economies than New Zealand, making possible certain sampling procedures that may not be possible in a nation of four million people. It may be a worthwhile future endeavour to make a similar comparison with a second tier of smaller OECD nations, such as Ireland.

Statistics NZ tried to make the closest possible match with New Zealand’s BPIs in terms of data coverage. Each nation arranges their indexes slightly differently. For ease of comparison, the indexes under consideration are included below.

The United Kingdom Office for National Statistics (ONS) PPI suite includes: home PPIs (domestic), export price indexes and import price indexes. Capital goods are included in their coverage.

The Australian Bureau of Statistics (ABS) produces a suite of PPIs, an import price index, and export price index. The PPIs include two services: transport (freight) and storage division, and the property and business services division.

Statistics Canada produces the Industrial Product Price Index (IPPI), Raw Materials Price Index (RMPI) and four service PPIs (accounting services, informatics professional services, consulting engineering services and traveller accommodation services). Canada's Machinery and Equipment Price Index parallels New Zealand’s CGPI, and their Farm Input Price Index (FIPI) parallels our FEPI.

The US Bureau of Labor Statistics (BLS) produces a PPI that includes capital goods. The PPI covers almost the entire output of domestic goods-producing sectors, and many service industries. Import and export prices are collected and indexed separately.

The Bank of Japan produces the Corporate Goods Price Index composed of the Domestic Corporate Goods Price Index, Export Price Index, and Import Price Index; capital goods are included in its coverage. They produce a separate Corporate Service Price Index.

The New Zealand suite of PPIs comprehensively covers both goods-producing and service industries.

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3. Index calculation

Statistics New Zealand

The business price indexes are calculated using a base-weighted Laspeyres index formula. They are rebased and reweighted periodically on a rolling cycle. The last cycle was fully completed in 1998, while the current cycle commenced in July 2003. The main source of weighting information is the Commodity Data Collection survey, supplemented with additional information obtained from various sources such as import and export statistics, trade organisations and industry experts. The weights are calculated according to the relative importance of commodities and businesses within an industry.

Typically, Statistics NZ price indexes are constructed in a hierarchical manner. At the lowest level actual price quotes are used to calculated indexes at the first level of aggregation. These index results then form the building blocks for higher level indexes.

The index base (reference period) is currently the December 1997 quarter (=1000). This means prices prevailing at the mid-point of the December quarter are used to compare future prices, until the index reference period is updated.

The PPI inputs and outputs indexes cover all the major market industry groups as defined by the Australian and New Zealand Standard Industrial Classification (ANZSIC). The all industries inputs index is made up of 47 industry indexes. Outputs indexes are not available for public administration and defence; education; health and community services; cultural and recreational services; and personal and other services industries, as reliable estimates of output prices have yet to be developed.

Office for National Statistics (United Kingdom)

United Kingdom PPIs are base-weighted Laspeyres indexes, rebased and reweighted every five years, using two years of Products of the European Community (PRODCOM) enquiry data as the major weighting source. Currently, the index reference period is 2000 (=100.0). To minimise compliance costs, purchase information is collected as part of the Annual Business Inquiry (ABI). Input indexes are calculated from input-output tables sourced from PRODCOM and ABI. Contributor weights for import indexes are derived from data provided by the importing company, whereas values for export indexes are taken from customs and excise returns.

PPIs are measured both gross and net of inter-sector sales. The high-level output price indexes given prominence in the first release are on a net basis, because this measure is considered the best reflection of manufacturing inflation on the rest of the economy by avoiding duplication of the contribution of the manufacture of intermediate goods.

Four high-level PPIs, which cover materials, fuels and outputs of all manufactured products, are published in both seasonally adjusted and unadjusted forms.

PPIs are calculated at the six-digit level and are aggregated to the four-digit class and higher based on the 1992 Standard Industrial Classification (SIC 92).

Chain-linking is an alternative method of rebasing currently under consideration, in which weights are updated on an annual basis rather than five-yearly at present, though for convenience the reference year is not normally changed.

Indexes for energy industries come from the Department of Trade and Industry. Indexes for construction are calculated by the Department of Environment Transport and the Regions.

Australian Bureau of Statistics

The ABS PPIs are industry-based, net sector indexes of material used and articles produced by major goods producing industries, while the international trade indexes relate to merchandise imports and exports. A principal advantage of the net sector approach is that it avoids any potential distorting effects that may result from multiple counting of transaction prices as commodities flow through.

The ABS uses a "stage of production" concept, in which commodities are classified into three stages according to their final economic destination, as determined by the national accounts input-output tables. Stage three products are final products that leave the economy and will not be used again in the production process (for example, consumer goods and services, capital goods and exports). Stage two covers intermediate commodities that are used up in the process of creating the final stage product (for example, electricity). Stage one contains preliminary products that are used up in the production of stage two commodities. Many commodities are included within more than one of the three stages, but with different weights.

In addition to the breakdown by stage of production, the ABS stage of production concept also increases the analytical power of the indexes by combining the PPI outputs and the Import Price Index to enable a complete analysis of inflation pressures flowing through the economy. The indexes are structured in such a way as to allow analysis of whether price pressures are caused by imported or domestic factors.

All the indexes are compiled using the Laspeyres fixed-weight formula using 1996–97 index weights. Index numbers for the recently established PPIs (that is, stage of production and the service industry and construction industry output indexes) are calculated on an index reference period of 1998–99 (=100.0). The index numbers for the other, longer established PPIs are calculated on an index reference period of 1989–90 (=100.0). The list of items and the weights are updated periodically to ensure they remain representative. New index series compiled using updated weights are linked to the previous series to maintain continuous time series. Broad level weights are derived from an analysis of the latest available input-output tables as well as other ABS and industry sources.

The export and import indexes are annually reweighted chained Laspeyres indexes and currently have index reference periods of 1989–90 (=100.0).The current weighting basis for the import price index was derived from the average value of import items during 2006-07. This differs slightly from the export price index which has used the average value of export items during 2005-06 and 2006-07, due to greater volatility associated with the value of export items.

The various published series are derived from the fine level component series using the combining weights that are published at the time of the latest index rebase and reweight. The procedure is identical to that used to calculate the fine level component series from specifications except that the weights used are fixed between index rebases and reweights.

Statistics Canada

Elemental PPIs are calculated for 980 Principal Commodity Group Aggregates (PCGAs) as defined in the 1997 input-output table. The level of detail available to the public is subject to strict controls on the statistical quality of the data as well as ensuring the confidentiality of the respondents.

The composite indexes are weighted averages of the elemental indexes. For the Industrial Product Price Index (IPPI), commodity and industry weights are taken from the output matrix of the input-output table produced by the Input/Output Division of the Canadian System of National Accounts (SNA). These tables are derived from shipment values reported for the Annual Survey of Manufactures (ASM) and edited to conform to the industry classification (North American Industry Classification System (NAICS)). However, each December, company/product weights within a commodity index can be changed to reflect important changes in production patterns. The entire weighting scheme for the IPPI is generally revised once every five years. The current index reference period is 1997 (=100.0).

Three sets of price indexes for industrial products are produced. The first set of indexes is grouped by commodities, weighted by their value of production in 1997, and arranged according to the medium-level commodity groupings from the input-output tables.

The second set of indexes covers the total commodity output of individual industries. These reflect the values of the output of the commodities produced in each industry in 1997. The industry indexes are derived from the NAICS, aggregated to the level required for the input-output tables and the measurement of Gross Domestic Product by industry.

The third set of indexes is grouped by their stage of processing. Commodities are combined according to where they fit into the stages of processing, who purchases them, and why they were purchased. In the stages of processing system, goods are initially divided into those used mainly as inputs (called "intermediate goods") and those that tend to enter directly into final demand (called "finished goods").

The intermediate goods group is further subdivided into those "first-stage intermediate goods", used in basic industries like primary metal products and basic chemical products, and "second-stage intermediate goods", used in other industries. This division is done because prices for "first-stage goods" tend to move in a similar way to the prices for their related raw materials, while prices for "second stage goods" tend to behave otherwise. The finished goods group is subdivided into finished food and feed items, capital equipment, and other finished goods.

Prices in the Raw Materials Price Index (RMPI) are usually equally weighted, unless there is good data from which to weight individual varieties.

Weights for most Service PPIs represent the gross business income for each establishment in the current reference year (updated annually), as reported in Statistics Canada’s database.

Machinery and Equipment Price Index weights for the 51 industries and 106 commodities represent shares of capital investment by industry for 1997 at 1997 prices, as derived from input-output data.

The main source for the Farm Input Price Index (FIPI) weights is the 1992 estimates of farm operating expenses and depreciation charges provided by the Agriculture Division of Statistics Canada.

Bureau of Labor Statistics (United States)

Bureau of Labor Statistics (BLS) PPIs are base-weighted Laspeyres indexes. The index reference period for most indexes is 1982 (=100.0). In 1999, the BLS rebased 37 PPI commodity-based and 36 PPI industry-based price indexes (mostly for hi-tech goods) to December 1998 (=100.0). These indexes had all dropped below 30.0, with little chance of rising to previous levels, or were part of an index aggregate where the majority of the shipment value was rebased.

The BLS uses a three-stage 'stage of processing' concept which has much in common with the ABS’ stage of production model, with some critical differences. Commodities are assigned to a stage not according to economic flows, but by their degree of processing. This assignment is determined by a subjective judgement as to the degree of processing the commodity has undergone. A simple example would assign wheat, flour and bread to the crude, intermediate and finished goods stages, respectively. This model is designed solely to measure price change in the domestic economy and does not include any imported items.

Sampled items are weighted by a measure of their size and importance. In the first stage of PPI computation, price indexes are constructed for narrowly-defined goods or services. The individual items included in these indexes are weighted by the establishment's revenue for the product line. In the second stage of PPI computation, indexes for individual goods and services are combined into aggregate indexes. Data for weighting together the product-line indexes comes primarily from the economic censuses of the U.S. Census Bureau. These weights are changed once every five years.

The weights for combining product-line indexes into aggregate indexes are somewhat different for each of the three types of aggregate indexes. For industry net output indexes, product-line weights are the value of shipments from establishments in the industry primarily engaged in the production of the product to establishments outside of the industry. For the traditional commodity grouping indexes, product line weights are the gross value of shipments across all industries engaged in the production of the product. For the commodity stage-of-processing indexes, the product-line weights from the traditional commodity grouping indexes are simply allocated, based on relationships seen in the United States input-output accounts, to the crude, intermediate, or finished goods stages.

The BLS publishes seasonally adjusted as well as unadjusted changes each month. Certain four-digit and six-digit commodity series are selected for seasonal adjustment if statistical tests indicate seasonality and if there is an economic rationale for the observed seasonality. Indexes for most two-digit commodity groupings and eight-digit individual commodities, as well as industry and census product indexes, are published only as unadjusted data. The BLS uses "intervention analysis" to compensate for instances where erratic behaviour of an index series causes substantial distortion of seasonal adjustment.

Bank of Japan

Japan uses chain-weighted Laspeyres indexes, rebased and reweighted every five years (currently 2005).

Foreign currency prices are converted using the monthly average of spot exchange rates.

The Domestic Corporate Goods Price Index is produced both including and excluding consumption tax.

Japan produces a variety of aggregate indexes. 'Index by stage of demand and use' re-classifies the basic grouping indexes by stage of demand, broken down by use. 'Classification by stage of demand' is divided broadly into domestic demand products (further separated into raw materials, intermediate materials and final goods) and exports. 'Classification by use' is the above classification by stage of demand, categorised into capital goods, consumer goods, etc based on how they are used. Finally, they produce a Prewar Base Index composed of the basic classification.

Summary

How indexes are organised varies widely. All countries discussed in this article, except the United Kingdom and New Zealand, use a variation on staged indexes: Australia and Japan classify products by their final economic destination, while Canada and the United States classify by degree of processing a product has and will receive. Each of these is an attempt to isolate sources of inflation in the production process for better economic analysis and forecasting.

There seems to be a difference of opinion as to the value of frequent rebasing (updating of the index reference period), which comes at the expense of index number time series continuity. The majority of Australia’s indexes are expressed on a 1989 index period, and the United States' on 1982. In contrast, The United Kingdom and Japan update the index reference period every five years, and Canada last did so in 1997.

How frequently the index weights and sample are updated can provide pointers to the accuracy and relevance of the indexes in a rapidly changing economy. All cases except Australia and New Zealand reweight every five years, and the United Kingdom is even considering moving to a chain-linking method of annual reweighting without rebasing. Those countries that reweight their indexes frequently tend to update the index reference period at the same time.

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4. References

Statistics New Zealand (Dec 1999). "Producers Price Index: Concepts, Sources and Methods", business-activity-stats-1999

Statistics New Zealand. "Information about the Producers Price Index (PPI)", http://www2.stats.govt.nz/domino/external/omni/omni.nsf/outputs/Producers+price+index

Statistics New Zealand. "Information about the Commodity Price Survey", http://www2.stats.govt.nz/domino/external/omni/omni.nsf/outputs/Commodity+Price+Survey

Statistics New Zealand. "Information about the Capital Goods Price Index", http://www2.stats.govt.nz/domino/external/omni/omni.nsf/outputs/Capital+Goods+Price+Index

Statistics New Zealand. "Information about the Farm Expenses Price Index", http://www2.stats.govt.nz/domino/external/omni/OMNI.NSF/Outputs/Farm+Expenses+Price+Index

Richardson I, Office for National Statistics (UK) (2000). "Producer Price Indices: Principles and Procedures".

McLennan W, Australian Bureau of Statistics (Feb 1997). "Analytical Framework for Price Indices".

McLennan W, Australian Bureau of Statistics (Mar 1999). "Producer Price Index Developments".

United States Bureau of Labor Statistics (Oct 2001). "Rebasing of Selected Producer Price Indices", http://www.bls.gov/ppi/ppibase.htm

United States Bureau of Labor Statistics (Nov 2004). "PPI Frequently Asked Questions", http://www.bls.gov/ppi/ppifaq.htm

United States Bureau of Labor Statistics (Mar 2004). "PPI General Overview", http://www.bls.gov/ppi/ppiover.htm

United States Bureau of Labor Statistics (Sep 2003). "BLS Handbook of Methods", http://www.bls.gov/opub/hom/homtoc.htm

Ministry of Internal Affairs and Communication (Oct 2004). "Guide to Official Statistics in Japan", http://www.stat.go.jp/english/index/official/index.htm

 

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