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January 2014

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

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The most heavily weighted item in the All Items CPI, owners’ equivalent rent, accounts for approximately 24 percent of the overall index. Owners’ equivalent rent is the implicit rent that owner occupants would have to pay if they were renting their homes and is included in the CPI in order to capture the cost of shelter for owner-occupied housing units.5 The PPI for personal consumption does not include owners’ equivalent rent within its scope, because owners’ equivalent rent is not a domestically produced, marketable output.

The PPI for personal consumption and the CPI also differ in their treatment of imports. The CPI includes within its scope goods and services purchased by domestic consumers and therefore includes imports. The PPI, in contrast, does not include imports, because imports are by definition not produced by domestic firms. Imports compose a substantial portion of the CPI, especially within the apparel and new-cars component, and their inclusion in the CPI and exclusion in the PPI for personal consumption causes a substantial difference between the two indexes.

The CPI includes only components of personal consumption that are directly paid for by the consumer, whereas the PPI for personal consumption includes components of personal consumption that are not paid for by the consumer. For example, the PPI for personal consumption includes medical services that are paid for by third parties such as employers or the federal government. The CPI, by contrast, includes only payments made directly by consumers for medical care. In December 2011, medical care services composed 23.1 percent of the PPI for personal consumption but only 5.3 percent of the all items CPI.

A final difference in scope between the PPI and the CPI occurs for services whose prices contain an interest rate component. The CPI’s scope excludes changes in interest rates or interest costs.6 The scope of the CPI includes services, such as banking services and insurance services, whose prices have an interest rate component, but the interest rate component of these services is not included in the index. The scope of the PPI also encompasses services whose prices include an interest rate component, but this index includes the interest rate component of those prices. Banking services account for approximately 4 percent of the PPI for personal consumption, and insurance services compose 3.8 percent. Within the PPI, changes in interest rates will affect price indexes for banking and insurance. The scope of the CPI includes some banking services, such as ATM fees, and many insurance services; however, the interest rate component of these services is not included. Changes in interest rates therefore do not affect the CPI.

In contrast to the CPI, the PPI does not currently have complete coverage of services. In the mid-1980s, the Bureau began expanding PPI coverage beyond mining, manufacturing, agriculture, and utilities, introducing its first services price index in 1985. The effort to expand coverage into the services sector of the economy is ongoing. The PPI currently covers approximately 72 percent of services, as measured by 2007 Census revenue figures for the sector. Because the PPI does not have complete coverage of services, a number of services are included in the CPI that are not included in the PPI for personal consumption. Among the most important of these services are residential rent, accounting for approximately 6.5 percent of the CPI, and education services, composing slightly more than 3 percent of the CPI.

Notes

5 Spending to purchase and improve houses is considered investment and outside the scope of the CPI. Investment in residential housing is in the scope of the PPI but would be classified in the investment portion of final demand as opposed to the personal consumption component. As of 2013, the PPI’s coverage of the construction sector of the economy was incomplete and did not include residential construction.

6 See “The Consumer Price Index” in the BLS handbook of methods, p.3.

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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.