U.S. PPI Program Enhancement: Adding Services & Construction to PPI s Primary Aggregation Structures (FD-ID) David Friedman Assistant Commissioner for Industrial Prices & Price Indexes US Bureau of Labor Statistics 28 th Voorburg Group Meeting Cross-cutting Topics Tokyo, Japan 9 October 2013
Introduction With the January 2011 data release, PPI introduced a new experimental index aggregation system, now called Final Demand-Intermediate Demand (FD-ID) PPI plans to shift the focus of its press release to this new FD-ID system with the release of data for January 2014 2
Introduction Services and Construction Background Prior to the mid 1980s, PPI produced only goods based price indexes Due to the rapid growth of the services sector, the PPI undertook an effort to expand its coverage to include services and construction price indexes 3
Introduction Long-Term PPI Goal The Stage of Processing (SOP) system indexes are currently the focus of the PPI press release The SOP indexes are aggregate indexes composed only of goods prices Since the expansion initiative began, PPI planned to add services and construction price indexes to the aggregate indexes featured in the press release Transition to FD-ID system is the first change in PPI s headline number since March 1978 4
Introduction Coverage Coverage of the service and construction sectors is high enough to produce meaningful new aggregate inflation numbers that include goods, services, and construction -72 percent of services covered (measured by Census revenue) -34 percent of construction covered (measured by Census revenue) 5
Current SOP system Finished goods Goods sold as personal consumption and capital investment Intermediate goods Processed goods purchased by businesses as inputs to production Crude goods Unprocessed goods purchased by businesses as inputs to production 6
Criteria for new PPI Aggregation System Include all commodities for which PPI currently has indexes Cover both intermediate and final demand Additional indexes should be able to be added to the system Eliminate or minimize multiple counting problems Conceptually understandable Analytically useful: Price transmission analysis Source of inflation pressures 7
Final Demand-Intermediate Demand System Expands coverage beyond SOP system by adding services, construction, exports, and government purchases more than doubles PPI coverage of the United States economy as compared to SOP system coverage is over 75 percent of in-scope domestic production 8
Final Demand-Intermediate Demand System System contains two main portions Final demand- personal consumption, capital investment, government, export Intermediate demand- purchases by business of inputs to production 9
Final Demand Indexes track prices for commodities sold to all categories of final demand. Indexes organized by type of commodity: Goods Transportation and warehousing services Trade Services Services excluding trade, transportation, and warehousing Construction Overall 10
Final Demand Structure Relative Index importance (December 2012) Final demand 100.000 Final demand goods 34.518 Final demand foods 5.582 Final demand energy 6.790 Final demand goods less foods and energy 22.146 Final demand services 63.443 Final demand trade services 20.390 Final demand transportation and warehousing services 4.849 Final demand services less trade, transportation, and warehousing 38.203 Final demand construction 2.039 11
Final Demand Structure (Continued) Relative Index importance (December 2012) Final demand services 63.443 Final demand trade services 20.390 Trade of finished goods 18.105 Trade of personal consumption goods 15.699 Trade of private capital equipment 2.406 Trade of government purchased goods 0.727 Trade of government purchased goods, excluding capital equipment 0.516 Trade of government purchased capital equipment 0.212 Trade of exports 1.558 Final demand transportation and warehousing services 4.849 Final demand services less trade, transportation, and warehousing 38.203 12
Final Demand versus Finished Goods Finished goods: goods sold to personal consumption and capital investment Final demand: Goods sold as personal consumption, capital investment, government, and export Services and construction sold as personal consumption, capital investment, government, and export Finished goods comprise only 24 percent of final demand 13
Final Demand and Components versus Finished Goods 112 110 108 106 104 102 100 98 Final demand Final demand goods Final demand services Final demand construction Finished goods 14
Final Demand Services by Type 116 114 112 110 108 106 104 102 100 98 Final demand services Final demand transportation and warehousing services Final demand trade services Final demand services less trade, transportation, and warehousing 15
Value Added of New Final Demand Indexes Adds services and construction to current PPI coverage Detailed indexes by type of buyer and type of commodity Available monthly Trade and transportation services separated from value of good Producer perspective 16
Two Treatments of Intermediate Demand (ID) Two separate parallel treatments have been created for different data users Commodity Type Similar to current SOP Adds intermediate services and intermediate construction Does not prevent multiple counting Commodity Flow Stage based system Adds intermediate services and intermediate construction Eliminates multiple counting 17
Intermediate Demand by Commodity Type No overall Intermediate Demand index Indexes track price change for intermediate demand commodities grouped by type of commodity 18
Intermediate demand: Commodity Type Indexes track prices for business inputs. Indexes organized by type of commodity: Unprocessed goods Processed goods Transportation and warehousing services Trade Services Services other than trade, transportation, and warehousing Construction 19
ID by Commodity Type Relative Importances Index Relative Importance (Decemeber 2012) Total intermediate demand (not calculated) 100.000 Processed goods for Intermediate Demand 43.240 Materials and components for manufacturing 19.351 Materials and components for construction 4.108 Processed fuels and lubricants 8.747 Containers 1.103 Supplies 9.930 Unprocessed goods for intermediate demand 9.402 Services for intermediate demand 46.928 Intermediate demand trade services 9.309 Intermediate demand transportation and warehousing services 6.500 Intermediate demand services less trade, transportation, and warehousing 31.119 Construction for intermediate demand 0.430 20
Intermediate Demand Commodity Type 134 129 124 119 114 109 104 99 Processed goods for intermediate demand Intermediate demand services Unprocessed goods for intermediate demand Construction for intermediate demand 21
Services for Intermediate Demand 117 115 113 111 109 107 105 103 101 99 Intermediate demand services Intermediate demand transportation and warehousing services Intermediate demand trade services Intermediate demand services less trade, transportation, and warehousing 22
Intermediate Demand by Production Flow: Introduction Commodities assigned to aggregates based on production flow Four intermediate demand stages More useful for price transmission analysis 23
Intermediate Demand: Production Flow PPI System Stage 1 Stage 2 Stage 3 Stage 4 Final Demand Example: Mining support services(s1) iron ore(s2) steel(s3) car parts(s4) cars(fd) Net indexes no multiple counting 24
Production Flow PPI System Various numbers of stages were tried. Four stage system performed the best in terms flow minimizing backflow and maximizing forward flow. 25
Intermediate Demand by Production Flow Relative Importances Relative Importance Index (December 2012) Total 100.000 Stage 1 intermediate demand 11.817 Goods 6.856 Services 4.956 Construction 0.006 Stage 2 intermediate demand 18.193 Goods 10.410 Services 7.667 Construction 0.116 Stage 3 intermediate demand 23.177 Goods 12.625 Services 10.436 Construction 0.116 Stage 4 intermediate demand 46.813 Goods 23.785 Services 22.867 Construction 0.161 26
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Percent change Percent change Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Percent change Percent change Intermediate Demand by Production Flow Index Change FD and all ID Stages 1 0.8 0.6 0.4 0.2 0-0.2-0.4-0.6-0.8 2 1.5 1 0.5 0-0.5-1 Final demand Stage 4 intermediate demand Stage 4 intermediate demand Stage 3 intermediate demand 6 5 4 3 2 1 0-1 -2-3 6 4 2 0-2 -4 Stage 3 intermediate demand Stage 2 intermediate demand Stage 2 intermediate demand Stage 1 intermediate demand 27
May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Percent change Percent change May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Percent change Percent change Intermediate Demand by Production Flow Index Change by Stage Food 5.0 4.0 3.0 2.0 1.0 0.0-1.0-2.0-3.0-4.0 8.0 6.0 4.0 2.0 0.0-2.0-4.0-6.0 20.0 15.0 10.0 5.0 0.0-5.0-10.0 FD foods Stage 4 foods 20.0 15.0 10.0 5.0 0.0-5.0-10.0 Stage 4 foods Stage 3 foods Stage 3 foods Stage 2 foods Stage 2 foods Stage 1 foods 28
May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Percent change Percent change May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Percent change Percent change Intermediate Demand by Production Flow Index Change by Stage Energy 6 4 2 0-2 -4-6 -8 6 4 2 0-2 -4-6 -8 12 FD energy Stage 4 energy 12 Stage 4 energy Stage 3 energy 7 7 2 2-3 -3-8 -8-13 -13 Stage 3 energy Stage 2 energy Stage 2 energy Stage 1 energy 29
May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Percent change Percent change May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 Percent change Percent change Intermediate Demand by Production Flow Index Change by Stage Goods less Foods and Energy 1 0.8 0.6 0.4 1.5 1 0.5 0.2 0 0-0.5-0.2-0.4-1 Final demand, core Stage 4 core 6 Stage 4 core Stage 3 core 3 2 1 0-1 -2-3 4 2 0-2 -4-6 -8 Stage 3 core Stage 2 core Stage 2 core Stage 1 core 30
Intermediate Demand by Production Flow Value Added Flow based approach facilitates passthrough analysis Includes services and construction Eliminates multiple counting through stage creation and net weighting 31
Outreach to Data Users While improvements significant, still represents major change for data users, especially the media & general public PPI program has designed extensive outreach program including briefings, supporting materials, analysis, etc. Parallel releases for July 2013 through December 2013 32
Contact Information David Friedman 202-691-6307 Friedman.David@bls.gov Jonathan Weinhagen Economist Producer Price Index 202-691-7709 weinhagen.jonathan@bls.gov