Analyzing price movements within the Producer Price Index Final Demand–Intermediate Demand aggregation system
Since the late 1970s, the Producer Price Index (PPI) has employed the Stage of Processing (SOP) system as its main publication structure. The SOP system is composed of price indexes for goods (1) sold to households, (2) as capital investment, and (3) as business inputs. The Final Demand–Intermediate Demand (FD–ID) aggregation system was introduced on an experimental basis in January 2011 and will become the PPI’s main publication structure in early 2014. The FD–ID aggregation system includes price indexes for goods, services, and nonresidential construction sold to final demand (households, government, exports, and capital investment) and to intermediate demand (business inputs). This article presents and analyzes limited historical data on the basis of the FD–ID system. As background to this analysis, the article reviews economic and commodity price trends from November 2009 through June 2012, the period for which the new aggregate data are investigated. The article then analyzes historical price movements for the final-demand indexes and the intermediate-demand-by-commodity-type portion of the system, provides a description of the intermediate-demand-by-production flow treatment, and examines price transmission within the production flow portion of the system.
Since the late 1970s, the Producer Price Index (PPI) has employed the Stage of Processing (SOP) system as its primary form of data analysis. The SOP system is composed of price indexes for goods and organizes these data by type of buyer and level of fabrication. Goods destined for households or capital investment fall under the finished goods SOP, while processed and unprocessed goods for business demand (excluding capital investment goods) fall under the categories for intermediate materials, supplies, and components or crude materials for further processing. Domestic production for government purchases and domestic production for export and are excluded from the SOP system.1
Over time, the PPI has expanded to include coverage of the majority of the services sectors of the United States economy and a portion of the construction sector. PPI coverage now includes indexes for trade services, distribution and warehousing services, and other service areas, such as professional services, insurance and annuities, banking, and health care, as well as indexes for selected nonresidential construction and maintenance and repair. PPI currently covers approximately 72 percent of services and 34 percent of construction as measured by 2007 Census revenue.2 As a result of this expansion, the PPI plans to enhance its primary aggregation system for data analysis. The restructured system, named the Final Demand–Intermediate Demand (FD–ID) system, was introduced on an experimental basis with the PPI release of data for January 2011. At that time, the majority of indexes from the FD–ID system were published with historical data beginning in November 2009. The new system combines data on services sold to households, exports of goods and services, nonresidential construction, and government purchases of goods and services with data on finished goods to provide coverage of final-demand inflation. The PPI program also has developed two treatments tracking price movements for intermediate-demand goods and services. One treatment replicates the current SOP system by tracking changes in selling prices for processed and unprocessed goods to intermediate demand, but adds categories for services and construction to intermediate demand. A second treatment breaks down intermediate demand using a production flow approach, separating intermediate demand into four stages.3 The shift from the SOP system to the FD–ID system with the release of data for January 2014 in February 2014 will greatly expand PPI coverage as a percentage of the U.S. economy. Currently, using relative importance figures, the final-demand index represents a fourfold increase in coverage compared with the finished goods index, while the expanded treatment of intermediate demand provides for roughly a doubling in coverage of the U.S. economy.4
This article presents and analyzes limited historical data from the new aggregation system. (An earlier article provided a detailed explanation of the methodology used to develop the new aggregation system, as well as a more detailed description of its structure.5) Data for this analysis are not seasonally adjusted. As a background to analysis of the new aggregate indexes, the article includes a section that presents economic and commodity price trends from November 2009 through June 2012, the period for which the new aggregate data are analyzed. The paper also includes sections that analyze historical data for the final-demand, intermediate-demand-by-commodity-type, and intermediate-demand-by-production-flow portions of the new system. This is followed by concluding remarks.
2 Important areas not included in the PPI are education, residential rent, and residential construction.
3 All PPI aggregate indexes, including the SOP indexes and FD–ID indexes, are constructed from producers’ output prices. In both the SOP system and FD–ID system presented in this article, commodity prices are aggregated according to the type of buyer, and producer output prices are used as a proxy for actual prices paid by the buyer. In many cases, the same commodity is purchased by different types of buyers and is therefore included in more than one aggregate index. In these cases, the same PPI commodity index often is used in all aggregations. For example, regular gasoline is purchased for personal consumption, export, government use, and business use. The PPI program publishes only one commodity index for regular gasoline (wpu057104), and this index is used in all aggregations regardless of whether the gasoline is sold for personal consumption, as an export, to government, or to businesses.
4 As of December 2011, the relative importance of finished goods as a percentage of final demand was 23.952 percent. Within intermediate demand on a gross-weighted basis, services slightly outweighed the combined weight of processed and unprocessed goods as of December 2011. On a net-forward-flow basis, the production flow system of intermediate demand allocated services inputs to intermediate-demand stages as follows: stage 4, 48.082 percent; stage 3, 44.584 percent; stage 2, 41.155 percent, and stage 1, 40.353 percent.