This week's Wiki-Wednesday topic is the U.S. Producer Price Index (there is no global PPI or I would have chosen that). An excerpt of the article is below, but you can click on any of our links to take you back to the page on Wikipedia.
Consider this article as background for tomorrow's post where we consider a question recently raised by our partner Charles Dominick at Next Level Purchasing regarding recent changes in pricing trends.
Producer Price Index
The official measure of producer prices in the US is called the Producer Price Index (PPI). It measures average changes in prices received by domestic producers for their output. The PPI was known as the Wholesale Price Index, or WPI, up to 1978. The PPI is one of the oldest continuous systems of statistical data published by the Bureau of Labor Statistics, as well as one of the oldest economic time series compiled by the Federal Government. The origins of the index can be found in an 1891 U.S. Senate resolution authorizing the Senate Committee on Finance to investigate the effects of the tariff laws “upon the imports and exports, the growth, development, production, and prices of agricultural and manufactured articles at home and abroad.”
The Producer Price Index family of indexes consists of several major classification systems, each with its own structure, history, and uses. However, indexes in all classification systems now draw from the same pool of price information provided to the Bureau by cooperating company reporters. The three most important classification structures are industry, commodity, and stage of processing (SOP).
The PPI for an industry measures the average change in prices received for an industry’s output sold to another industry. For more than 20 years the PPI used the Standard Industrial Classification (SIC) system to collect and publish data. This system received criticism for its inability to adapt to changes in the United States economy. Consequently, the BLS began in January 2004 to publish the PPI data in accordance with the North American Industry Classification System (NAICS). This system was developed in cooperation with Canada and Mexico, and categorizes producers into industries based on the activity in which they are primarily engaged.
The PPI commodity index organizes products by similarity of end use or material composition. This system is unique to the PPI and does not match any other standard coding structure, such as the SIC or the U.N. Standard International Trade Classification (SITC). Historical continuity of index series, the needs of index users, and a variety off ad hoc factors were important in developing the PPI commodity classification.
Stage of Processing
The PPI commodity index regroup commodities according to the class of buyer and the amount of physical processing or assembling the products have undergone. Finished goods are defined as commodities that are ready for sale to the final-demand user—either an individual consumer or a business firm. The category of intermediate materials, supplies, and components consists partly of already processed commodities that still require further processing. Crude materials for further processing are defined as unprocessed commodities not sold directly to consumers
Calculating Index Changes
Movements of price indexes from one month to another usually should be expressed as percent changes, rather than as changes in index points, because the latter are affected by the level of the index in relation to its base period, while the former are not. Each index measures price changes from a reference period defined to equal 100.0. The current standard base period for most commodity-oriented PPI series is 1982, but many indexes that began after 1982 are based on the month of their introduction.
An increase of 20 percent from the base period in the Finished Goods Price Index, for example, is shown as 120.0, which can be expressed in dollars as follows: “Prices received by domestic producers of a systematic sample of finished goods have risen from $100 in 1982 to $120 today.” Likewise, a current index of 133.3 would indicate that prices received by producers of finished goods today are one-third higher than what they were in 1982.