Article

January 2014

Comparing new final-demand producer price indexes with other government price indexes

Analyses of the PPI for personal consumption and the CPI-U, the PPI for export goods and the IPP export index, and the PPI for final demand and the BEA price indexes for GDP and gross domestic purchases reveal that (1) the PPI for personal consumption and the CPI-U differ in scope and coverage, categorization, and other technical areas; (2) the PPI for export goods and the IPP export index are similar in scope, but differ because the IPP export index is constructed from actual export prices whereas the PPI for export goods uses commodity prices as proxies for export prices; and (3) the PPI for final demand and the BEA price indexes for GDP and for gross domestic purchases differ as a result of calculation formulas, coverage, and their respective treatments of government and international transactions.

With the release of Producer Price Index (PPI) data for January 2011, the Bureau of Labor Statistics (BLS, the Bureau) introduced a new index aggregation system, the Final Demand–Intermediate Demand System, on an experimental basis. The new system expands coverage beyond that of the current PPI Stage of Processing (SOP) system by adding price indexes for services, construction, exports, and government purchases.1 The Bureau plans to shift the focus of the PPI press release to this new system with the release of data for January 2014. The PPI for final demand, an index that measures price change for goods, services, and construction products sold for personal consumption, for capital investment, for export, and to government, will be highlighted in the updated PPI press release. To provide a complete picture of final-demand inflation, and to allow data users to analyze final-demand inflation at its component source, the system also includes indexes that track price change for outputs sold for personal consumption, for capital investment, for export, and to government. The PPIs for personal consumption and exports are designed to measure price change for roughly the same portions of the economy measured by the Consumer Price Index (CPI) and the International Price Program (IPP) index for exports. The PPI for overall final demand measures price change for approximately the same portion of the economy measured by the Bureau of Economic Analysis (BEA) price indexes for gross domestic product (GDP) and gross domestic purchases.

This article examines methodological and empirical similarities and differences among several sets of price indexes. It is important to note that the economic concepts measured by each government program, and thus the indexes produced by each, need not exhibit the same levels, or even the same trends, over time. The article shows that, although the new PPIs appear to measure price change for the same portions of the economy as do the CPI and the IPP and BEA indexes, important methodological differences exist that in some cases result in substantially different movements for apparently similar indexes.

PPI for personal consumption versus U.S. All items CPI for All urban consumers

The All items CPI for all urban consumers (CPI-U), U.S. city average, measures the average change in prices urban consumers pay for goods and services.2 The PPI for personal consumption tracks the average change in selling prices received by producers for goods and services sold to consumers.3 The PPI for personal consumption and the CPI cover similar sectors of the economy but differ in a number of ways. Differences can be classified into three main areas: scope and coverage, categorization, and other technical differences.4

Scope and coverage. The scope of the PPI for personal consumption includes all marketable output sold by domestic producers to the personal consumption sector of the economy. The majority of the marketable output sold by domestic producers comes from the private sector; however, government produces some marketable output that is within the PPI’s scope. In contrast to the PPI’s scope, that of the CPI includes goods and services provided by business or government when explicit user charges are assessed and the goods or services are paid for by consumers.

Notes

1 For a detailed description of the new PPI aggregation system, see Jonathan C. Weinhagen, “A new, experimental system of indexes from the PPI program,” Monthly Labor Review, February 2011, pp. 3–24, http://www.bls.gov/opub/mlr/2011/02/art1full.pdf.

2 For a detailed description of the CPI methodology, see “The Consumer Price Index,” BLS handbook of methods (U.S. Bureau of Labor Statistics, June 2007), chapter 17, http://www.bls.gov/opub/hom/pdf/homch17.pdf.

3 All PPI aggregate indexes, including the SOP indexes and final-demand producer price indexes, are constructed from producers’ output prices. In both the SOP system and the final-demand indexes presented in this article, prices of goods 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, for export, to government, or to businesses.

4 The Bureau publishes three official CPIs: the CPI for All Urban Consumers (CPI-U), the CPI for Urban Wage Earners and Clerical Workers (CPI-W), and the Chained CPI for All Urban Consumers (C-CPI-U). For the remainder of this paper, all references to the CPI are to the CPI-U.

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About the Author

Jonathan C. Weinhagen
weinhagen.jonathan@bls.gov

Jonathan C. Weinhagen is an economist in the Division of Industrial Prices and Price Indexes, Office of Prices and Living Conditions, U.S. Bureau of Labor Statistics.