Escalation Guide for Contracting Parties
Business firms in search of effective methods for coping with changes in prices
often employ price adjustment (escalation) clauses in long-term
sales and purchase contracts. BLS estimates that agreements with a lifetime worth
in the trillions of dollars are currently escalated using the Producer Price Index (PPI) family of indexes,
either alone or in conjunction with other sources of economic data.1
Because they measure price changes objectively, both at the aggregated
level and for particular products, free from possible manipulation by
either of the contracting parties, PPIs calculated by the Bureau of Labor Statistics (BLS)
are widely recognized among business people, economists, statisticians, and accountants
as useful in price adjustment clauses.
This document provides guidance on the development of escalation
clauses in contracts that are to be tied to PPI
data. Such clauses should be written with great care to avoid
serious problems when contract adjustments are implemented. The
information in this Guide is based on BLS staff experience
in handling issues that have been brought to their attention in
connection with actual escalation clauses.
The role of the BLS is to provide requested
data and to explain their underlying methodology and limitations.
The BLS does not encourage or discourage the use of price adjustment
measures in purchase agreements, sales agreements, and contracts.
The BLS does not directly assist in writing contracts, nor does it
provide advice regarding disputes arising from contract interpretation. Because index
methodology and publication conventions could be crucial in developing
escalation clauses, this Guide is intended to alert users to
potential problems arising in these areas.2
This Guide is divided into three sections. First, an overview
of the PPI system describes the major categories
and groupings of the several thousand indexes that are published
each month. Then, guidelines for assisting in the development of
escalation clauses are outlined. Finally, a practical example
of provisions that might be incorporated into a contract is presented,
based on the guidelines discussed, along with an example of
the price adjustment calculations that would be needed to implement
This Guide provides summary information on a number of issues relating to PPI.
For a more detailed review of PPI concepts and methods, see the
BLS Handbook of Methods, Chapter 14: Producer Prices.
The Structure of Producer Price Indexes
Producer price indexes measure the average change in prices received
by domestic producers for their output. A PPI is an output price index.
That is, it measures price changes received by mining, manufacturing, services,
and construction providers. It does not measure the
cost of producing a good, providing a service, or building a structure,
though costs do factor into the selling price. PPI data are based on selling prices
reported by establishments of all sizes selected by probability
sampling, with the probability of selection proportionate to size.
Individual items and transaction terms from these firms are also
chosen by probability proportionate to size sampling methods. PPIs are based on a
monthly sample of over 100,000 prices.
PPIs are organized in three major structures:
(a) Final Demand-Intermediate Demand (FD-ID) System: The final demand portion of the
FD-ID structure measures price changes for goods, services, and construction sold as
personal consumption, capital investment, to government, and as exports.
The intermediate demand portion of the FD-ID system tracks price change for goods,
services, and construction products sold to businesses as inputs to production,
excluding capital investment. The FD-ID system replaced the Stage-of-Processing
system in January 2014.
(b) Commodity type: The commodity classification structure of the PPI organizes
products by similarity of end use or material composition, irrespective of industry
origin. Prior to January 2009, the commodity-type classification system included
only goods-based price indexes. With the release of data for January 2009, PPI
expanded the commodity classification structure to include services and
(c) Industries and their products: The industry-based classification structure
measures changes in prices received for industry outputs. At the industry and
industry-group level, indexes track price changes for products and services sold
outside the industry of origin. These indexes reflect the price trends of a
constant set of goods and services that together represent the total net output of
industries, as defined in the North American Industry Classification System (NAICS).
For a more detailed description of these three index structures,
see the Appendix to this document.
Within each of the three major structures, indexes are available at different
levels of aggregation and detail. There are broad FD-ID indexes (for example,
Materials and components for construction, Transportation and warehousing
services for Intermediate Demand), broad industry indexes (for example,
Total manufacturing industries, Selected health care industries), as well as
indexes for specific industry products and commodities (for example, diesel fuel,
steel mill products, motor vehicle parts, truck transportation of freight, and
business wired telephone services).
Guidelines for Developing Escalation Clauses
(1) Establish the base selling price subject to escalation.
The item price subject to escalation should be specified
as precisely as possible. State whether the base price refers
to a per-unit quantity or a certain volume of units. Give the effective
month and year of the base selling price; this time period is
often called the base period. Indicate the length of time the base
price will remain in effect. (Note that BLS no longer publishes unit prices for any item within the PPI system. From the Program's inception until 1985, unit prices were published for selected index categories.)
(2) Select an appropriate index or indexes.
A high-level FD-ID index, such as Final demand, Finished goods,
Processed goods for intermediate demand, or Services for intermediate
demand indicate the general trend of inflation at a broad level that
may be appropriate for the escalation agreement. There are detailed
FD-ID indexes that exclude food, energy, and trade, for
users wishing to avoid the effects of volatile price movements in these goods and services. Detailed Intermediate Demand indexes under the
category for Processed goods for intermediate demand (formerly
called the index for Intermediate materials, supplies, and components)
may best indicate price trends for semi-finished goods, components,
and supplies for business demand. Indexes for specific 4-, 6-, or
8-digit commodity indexes, or for industry-based indexes that reflect
product or service lines or groupings of products or services, may
better indicate price trends at a more detailed level. (See Appendix
for more information about indexes and index structures.)
Contracting parties may want to escalate the base price by a single
PPI series. Often, however, users prefer to escalate on the basis of
several data series, including data from other Government
statistical programs, to reflect changes in costs of a variety of
inputs. In some contracts, for example, costs of major materials
and supplies are escalated with one or more PPIs, while costs of labor
are escalated with other BLS series such as the Employment Cost
Index.3 In such cases, the escalation clause should specify the percentage weight given to
each index in calculating the total escalation amount. (See detailed
discussion under guideline (9)(d).)
Contracting parties should choose an index or group of indexes representing
the costs for providing a particular product or service, rather
than an index for the product itself. For example, if an apparel
manufacturer were contracting for long-term purchases with a producer
of finished fabrics, it would be more advisable to tie the escalation
clause to a PPI for synthetic fibers, processed yarns and threads, or
greige fabrics (raw fabric), rather than to a PPI for a type
of finished fabric. Otherwise, the parties could find themselves
in a serious contracting problem that would be difficult from which to
Regarding the level of index aggregation or detail that might
be chosen, it should be understood that while detailed indexes
may target costs more specifically, they are also more likely
to be permanently discontinued by BLS, or to have occasional gaps
in data availability. Contracts should provide for these contingencies.
This hazard can be minimized if contracting parties cite a commodity index
that does not go below the 4- or 6-digit level of detail, or an
industry-based product code that does not go below the
Even with the PPI program's nearly complete coverage of the mining
and manufacturing sectors, not all products are included directly
in the PPI sample or published in the PPI system. Sometimes related
indexes or higher level indexes must be chosen as proxies to estimate
(3) Clearly identify the selected index and cite an appropriate
The escalation clause of a contract should identify the index or group
of indexes selected by providing complete titles and identifying codes.
Please note that there is no single index titled "The Producer
Price Index." The term "Producer Price Index" refers
to a family of indexes compiled by the Bureau of Labor Statistics.
Each index to be used should be cited specifically in the contract
by referring to "the Producer Price Index for..." followed by the
exact title and any identifying code number.
The clause should also cite an appropriate source for the index
selected. The primary official source of PPI data is the BLS Website. From
the PPI homepage, data may be obtained using various methods:
(a) Link to the PPI database to access
various methods for downloading data. For an explanation of these
database tools, link to the PPI Data Retrieval Guide.
(b) The monthly periodical, PPI Detailed Report
includes all PPIs currently in publication, and is available online each
month the day PPI data are released. This publication provides current
month index values (first issued), previous month index
values (first issued), 4 month prior index values (revised), as well
as 1-month and 12-month rates of change.
(c) The PPI news release, published monthly, provides index data, 1-month,
and 12-month percent changes for a subset of more widely used PPIs.
Link to PPI News Release
and Archived PPI News Releases
for current and archived PPI news releases.
Contracting parties should not cite table numbers or table
titles in their escalation contracts, since they are subject
to change. BLS sources are preferable to secondary sources, such
as other government publications or private firms. If contracting
parties agree to obtain index values for escalation over the
telephone from BLS staff members, the escalation clause should specify
appropriate procedures and whether subsequent verification from
a published source is necessary.
(4) Specify whether seasonally adjusted indexes or unadjusted
indexes are to be used.
In general, seasonally adjusted indexes are not appropriate in
escalation agreements. Because price adjustment clauses usually
are intended to capture actual price changes, contracting parties
normally would not want to remove seasonal price movements from
their adjustment calculations.
(5) State the frequency of price adjustment.
The escalation clause should specify when price adjustments
are to be made, such as quarterly, semi-annually,
or annually, or some other period. To conform to the procedure
described in guideline (9) below, price adjustments should be
calculated over an interval whose beginning point is the
contract's base period. This is the time period associated
with the chosen base price. For a discussion of base price,
see guideline (1).
Difficulties can be encountered with those contracts that do
not designate a specific frequency for price adjustment, but rather
state that the latest data available as of a certain date should
be used for adjustment. Guideline (7) expands upon this issue.
Note that PPI data are published as monthly indexes and
as annual averages for calendar years. Monthly PPIs
are representative of the entire month and do not refer
to a specific day of the month. Avoid wording such as "the
index for aluminum mill shapes, PPI commodity code 102501,
as of September 30," since several different and
equally plausible interpretations are possible for such
language. For example, "as of September 30" could refer to
the index that was available on September 30, which would
be the August figure. That phrase also could refer to
the September index. It could even mean the October index,
since the September index would be based on information
supplied to BLS well before September 30.
(6) Provide for missing or discontinued data.
Occasionally, a PPI may be unavailable for a particular
time period, usually because price information was not
supplied by a sufficient number of survey respondents
to meet BLS publication standards. Highly detailed indexes are
more susceptible to this problem than indexes for broader groupings.
For example, the PPI for Metal tanks and vessels, custom fabricated
and field erected, code 1072-0152, was temporarily unavailable
from July 2011 to September 2012. During that period,
contracting parties might have used code 1072-01, Metal tanks,
or some other series of their choosing. Escalation clauses
should provide procedures for times when PPI data do not publish.
Sometimes an index is permanently discontinued if a product
declines in market importance. This most commonly occurs at
the time of periodic resampling of industries and their output.
As is the case when an index fails to meet minimum publication
standards, escalation clauses should provide guidance for successor
indexes in cases when original indexes are discontinued.
A default provision that calls for using the next higher-level
series might be included in the contract.
Note that if BLS merely changes the title or recodes an index,
it is considered to be the same series, and therefore, this
situation should not necessitate any contract renegotiation.
The online monthly periodical PPI Detailed Report
routinely provides lists of recoded indexes each time there
are sample changes. Normally, these lists appear in the
January and July issues.
(7) Specify that calculations of price adjustments shall always
use the latest version of the PPI data published
as of the date specified for such calculations. This requires
contracting parties to explicitly agree on the base and comparison
months employed by the escalation, as well as the precise month
and the approximate date that the price adjustment calculations
are to be made.
Adherence to this principle and its implications will prevent
many potential problems. Contracts that fail to incorporate this
guideline will instead need to specify which version of PPI data
should be used, because:>
(a) BLS routinely revises PPI data 4
months after initial publication;
(b) PPI data are rebased at
infrequent intervals; and
(c) on rare occasions, PPI data may be
Among other advantages, following guideline (7) should resolve
any ambiguities arising due to the fact that all PPI not seasonally
adjusted data are routinely subject to revision once, 4 months after
original publication, to reflect late reports and corrections by
respondents in the PPI survey. Revisions are usually small at the higher
levels of index aggregation, but may be relatively large for
detailed indexes. The version of any PPI published 4 months
after its initial publication is considered final and will not
change again, barring corrections or rebasing, a separate matter
addressed in guideline (8).6
To follow guideline (7) effectively, it is essential to specify
not only frequency/interval for escalation, but also the approximate
date on which the price adjustment is to be made. Currently,
PPI data are usually published between the 10th and the 18th
of the month following the reference month in question.
(However, the January data release in February might occur a few
days later.) Therefore, a contract might state that parties to
an escalation agreement should contact the PPI prior to the 10th
of the month following the designated month for escalation in order
to verify the date that data will be available to enact the price
adjustment. All first-published indexes for a given
month, as well as final indexes for the fourth month earlier,
are considered officially published and are available on the day
of release of those data.
The contracting parties' selection of the date for price adjustment
should be made only after they have agreed on, (a) the base period
reference month, (b) interval for price adjustment, and (c)
whether the calculation is to be based on the first-published
or the final index values for the escalation month. It is vital to
address these matters before a contract is signed.
Otherwise, disagreements may arise when the first-published and
final versions of the selected index are different.
If contracting parties do not specify an exact date for making
price adjustments, the contract should at least specify whether
first-published or final data should be used for calculations.
The final version of the data for the escalation month should
be specified whenever feasible, because only final data will be
rebased retroactively whenever BLS updates the PPI reference base.
Contracting parties might choose to use first-issued indexes for
the current period of the escalation if capturing more recent
price movements is valued by the parties to the agreement.
Any procedure that departs from guideline (7) by failing to specify
the version of the data or the date when the price adjustment is
to be made, needs to be constructed so that it will be in harmony
with the frequency of price adjustment, as specified elsewhere
in the contract. This is discussed in guideline (5).
A contract should not refer to an index value associated
with a base price, but instead to its month and year alone. For example, the following reference could prove problematic:
Divide the current index value by 103.9
(which is the value of the index for the base period January 2010)
Rather, it should be written:
Divide the index value which corresponds with the month
associated with the contract escalation by the index value for
January 2010, which represents the base period index value,
(8) Avoid locking indexes used for escalation to a particular
index reference base period.
Contracting parties should follow the principle of guideline
(7) by calculating percent changes using indexes expressed on
the index reference base period in use when the contract escalation
is applied. For example, if a contract called for a price
adjustment to be made using data for December 1987 published in
January 1988 (which was just prior to the rebasing that became
effective on February 12, 1988), indexes expressed on the old
reference base of 1967=100 would have been used.
Comprehensive index base period changes to the PPI system have
been routine, although infrequent. The most recent large-scale
conversion occurred when the index reference base period was set
to 1982=100 in early 1988. This was the first such rebasing
since BLS adopted 1967 as the standard in 1971, and that in
turn was the first rebasing since the 1957-59 base was adopted
in 1962. Previously, the standard reference base period was
updated roughly every 10 years. 7
Relying upon a current index reference base period as set by
BLS will not affect calculations, except for differences related
to rounding. However, rounding could make a meaningful
difference when the dollar amount of a contract is very large,
or if the index prior to rebasing stood at a relatively high
Official PPI data based on the current reference base are not available on
previous index reference base periods. Further, as a general
rule, estimating a conversion of PPI data to an old base for
the purpose of contractual price adjustment is inadvisable
because such a method could well be challenged for referencing
something other than official government data.
However, for parties wanting to look back to the prior index reference base, rebasing factors are only made available by BLS to convert data
on the current standard reference base period to the immediately
preceding one. For example, there are no official rebasing
factors to convert data on the 1982=100 base back
to the 1957-59 =100 index base.
Rebasing is not considered "revising," because the relative
movements of any series over time are not affected, outside
of rounding. The absolute level of any index has no intrinsic
meaning other than relating a measurement to the base year, which
is itself arbitrary to a degree.
Older contracts may specify use of originally published
indexes, particularly since this was recommended by BLS in the
September 1979 version of this Guide (BLS Report 570). BLS is now
strongly discouraging such language in escalation contracts, in
accordance with guidelines (7) and (8), recommending that the latest
available version of index data be used. In addition, BLS does
not maintain database records for originally published indexes. As a result,
no official versions of such originally published indexes are readily available.
(9) Define the mechanics of price adjustment.
(a) Simple percentage method.
One method of price adjustment
is to have the base price changed by the same percentage as the
percent change in a selected PPI. To illustrate, suppose that a
contract escalation clause called for using the intermediate
demand PPI titled Materials and components for manufacturing,
not seasonally adjusted. Also suppose that the value of this index
was 178.4 for December 2010, the month that corresponds with the base
price for escalation, $1,000 per unit. Twelve months later, when
December 2011 data were released and the first stipulated price
adjustment was to be made, the index value for December 2011, published
mid-January 2012, was 187.7. The percent change represents an
increase of 5.2 percent in the index for Materials and components
for manufacturing and a $52 per unit increase in the price for the
escalated product. (See below.)
Index at time of calculation, December 2011: .................... 187.7
Divided by index at time base price was set, December 2010: ..... 178.4
Equals .......................................................... 1.052
Base price ..................................................... $1,000
Multiplied by .................................................. 1.052
Equals adjusted price .......................................... $1,052
In later years, this procedure could be applied again by taking
the next year's December index value, dividing by the index value
at the time the base price was set, and proceeding as described
above. For example, let us assume that this contract continued
through the year 2013. In mid-January 2013, the December 2012
index would be released by PPI. The ratio of price change would
be derived by taking the December 2012 index and dividing by
the December 2010 value, and multiplying this result by the
base price of $1,000 to provide an updated price for 2013.
Index at time of second calculation, December 2012: ............. 187.2
Divided by index at time base price was set, December 2010: ..... 178.4
Equals .......................................................... 1.049
Base price ..................................................... $1,000
Multiplied by .................................................. 1.049
Equals adjusted price .......................................... $1,049
Note that in this example, because prices for materials
and components for manufacturing declined in 2012, the escalated
price in 2013 would be slightly lower than it was in 2012.
(b) Escalation of a portion of the base price.
procedure sometimes employed identifies a portion of the base
price to be escalated by a selected PPI, while the balance remains
fixed. To illustrate, suppose that an item has a base price of
$1,000, of which $700 is to be escalated by the index, while the
other $300 remains unchanged. To determine the "certain dollar
amount" that is needed for citation in the contract, divide the
designated variable portion of the base price ($700) by 100,
in this case yielding $7 for each 1.0 percent movement in the
index. Based on the prior example using the PPI for Materials
and Components for Manufacturing, the base price would be
escalated to $1,036.40 after one year.
Base price ...................................................... $1,000
Index at time of calculation, December 2011: ..................... 187.7
Index at time base price was set, December 2010: ................. 178.4
Equals percent change for 2011: .................................... 5.2
Escalation adjustment: ................................... 5.2 × $7 = $36.40
Equals adjusted price: $1,000.00 (base price) + $36.40 (adjustment) = $1,036.40 (escalated price)
(c) Index points.
Relatively few escalation clauses
adjust contract prices on the basis of changes in index points.
The BLS strongly discourages this practice, because changes in index
levels do not reflect percent changes in prices when the values move
away from their base level of 100. For instance, in the earlier
example, an index point change of 9.3 reflected the 5.2-percent
increase in prices for material and components for manufacturing
from December 2010 to December 2011. Escalating by index point
changes has the effect of overestimating the percentage change in
prices when the index is above 100 and underestimating the percentage
change in prices when the index level is below 100. In addition,
contracts employing the index point method are subject to
complications relating to index base date changes.
(d) Composite indexes.
Some contracts provide for the
construction of a composite index based on several series. The advantage
of a composite index is that it may more accurately identify the
appropriate change for a base price (see guideline (2)),
since it would refer to several of the costs involved in producing
the product or service in question. However, a composite index
entails more calculations at the time of adjustment than the simpler
procedures described earlier. Though these composite calculations
often employ official BLS data, these composite indexes constructed
by the contracting parties are not official BLS data.
The procedures for specifying a composite index to be used in an
escalation agreement are illustrated by the following steps:
(i) Choose the indexes that will represent the different costs
involved in producing the good or service. For example,
indexes for energy, machinery and equipment, services, and
labor might provide an appropriate mix.
(ii) Choose the appropriate weights for these indexes, in accordance
with the proportion of the production budget which may be devoted
to these various categories. The weights should be assigned as
proportions and sum to 1.0, the equivalent of 100 percent coverage.
For example, a producer might decide that for a specific escalation
calculation, the appropriate weightings for energy, machinery and
equipment, services, and labor might be 0.15, 0.25, 0.25, and 0.35,
(iii) The weights should be representative of the time period
associated with the base price, which would be the base period
for any calculations.
(iv) Once indexes have been chosen and relative proportions
assigned, it is necessary to rebase all of the original index
data to the contract's base period. This is done for each series
by dividing the indexes that correspond to the escalation month
and year by their index values in the base period, and then
multiplying the result by 100. For this and following steps,
note the detailed example in Table 1 that follows in the
Example of Escalation Procedures section.
(v) Derive the value for the composite index by multiplying the
relative weights for each cost category by the rebased index values
for each index series. Then, sum the results.
(vi) Using the composite index values created in step (v), calculate
the current adjustment in standard fashion; that is, using
the procedure described in guideline (9)(a).
(e) Limits for price adjustment.
Escalation clauses sometimes
reference a floor, a ceiling, or both, to limit the total
price adjustment during the life of the contract. Contracts typically
provide that an escalation is to apply in both an upward and downward
direction. On occasion, however, contracts stipulate that the base
price is a price floor and that prices can only rise. In addition,
some contracts specify that no price adjustments are to be made until
a minimum price change to the contract escalator has occurred.
Example of Escalation Procedures
Suppose a manufacturer of widgets enters into a long-term sales
contract with a customer. The buyer and the seller agree to include
an escalation clause that adjusts the selling price yearly, up or down,
to account for changes in energy, machinery and equipment, business
service, and labor costs. The following is an example of the terms
that might be incorporated into such an escalation clause. The example
assumes the use of the composite index method, discussed in section (d)
of guideline (9).
(a) The base selling price for type A widget is set at $1,000 per
unit as of December 2010, to remain in effect for 1 year. December
2010 is hereafter called the base period.
(b) The base selling price shall be adjusted in accordance
with the percent changes of the composite index described
in (D) below. The index shall be derived from the following
(i) Energy: PPI code ID69113, Processed energy goods,
database code WPUID69113,
(ii) Machinery and equipment: PPI code 114, General
purpose machinery and equipment, database code WPU114,
(iii) Services: PPI code ID63, Services for intermediate
demand, database code WPUID63,
(iv) Labor: Employment Cost Index (ECI) for Total
Compensation (wages and benefits), private industry, goods producing
industries, database code CIU201G000000000I. Note that this BLS
index is published on a quarterly basis, and as such, 4th quarter
values will be used for the escalation calculation.
PPI data can be obtained from the BLS Website,
by emailing the PPI at firstname.lastname@example.org,
or by calling (202) 691-7705. To access data from the ECI, visit the ECI website,
submit a question via the online form, or call (202) 691-6199.
(c) The selling price shall be adjusted on or after February 1 of each
year, beginning 12 months after the contract is initiated, for all
years that the contract remains active, based on the percent change
(up or down) in the composite index described below. The calculation
will compare the base period (December 2010) with December of the most
recent year. PPI data for December are typically released mid-January,
and Employment Cost Index data for the fourth quarter are typically
released by the end of January. Contact the PPI and the ECI each
January to identify when December PPIs and the fourth quarter ECI data
are scheduled for publication. All calculations shall be based on the
latest versions of the PPI and the ECI available on or after
February 1 when the December PPIs and the fourth quarter ECI are
published. All indexes for this calculation are not seasonally adjusted.
(d) The composite index shall be derived in the following manner:
(i) The values for the current period for each of the 4 BLS
index series specified in (b) above shall be rebased to the reference
base period December 2010. This shall be done by dividing the
current December value of each index by its value for the base
period, and then multiplying the result by 100.
(ii) The rebased energy index shall be assigned a proportion of
0.15, representing 15%. The rebased machinery and equipment
index shall be assigned a proportion of 0.25 (25%). The
rebased services index shall be assigned a proportion of
0.25 (25%). The rebased labor index shall be assigned a
proportion of 0.35 (35%). These proportions sum to 1.00 (100%),
and correspond with the base period of December 2010.
(iii) Multiply the rebased current index for each component by its
(iv) The sum of these 4 values shall result in the composite
index for the current time period.
(v) Divide the component index by 100 and multiply that result
by the original base price. This final figure shall be the
adjusted price for the current time period.
(e) If December ECI data are not available for any year,
the ECI for the immediately preceding September shall be used
as the basis for adjustment of the labor index. If December PPI
data are not available for any year, the PPI data for the most
recent immediately preceding month shall be used as the basis
for adjustment. If no ECI or PPI data have been published for
those months, then the contracting parties shall agree upon
With these terms in effect, table 1 below is an example of
the data and calculations which would have been made on
February 1, 2012 to determine the new per unit selling price
for type A widgets based on changes in specified BLS indexes
from December 2010 to December 2011.
Table 1. Sample Calculation Procedures for a Composite Index Calculation
||Machinery and equipment
|Base price = $1,000 per unit sold
|Escalation period index (Dec. 2011 / 4th qtr. 2011) ||217.0 ||210.5 ||103.4||113.8 ||-
|Divide by base period index (Dec. 2010 / 4th qtr. 2010) ||195.7 ||202.1 ||101.4 ||111.1 ||-
|Equals: ||1.109 ||1.042 ||1.020 ||1.024 ||-
|Multiply by 100 to yield the rebased index ||110.9 ||104.2 ||102.0 ||102.4 ||-
|Assigned proportion ||0.15 ||0.25 ||0.25 ||0.35 ||-
|Multiply rebased index by assigned proportion ||16.6 ||26.1 ||25.5 ||35.8 ||-
|Add components to obtain the composite index ||- ||- ||- ||- ||104.0
|Divide composite index by 100 ||- ||- ||- ||- ||104.0
|Multiply the result by the base price to yield adjusted price ||- ||- ||- ||- ||$1,040
On or after February 1, 2013, if this escalation agreement remained
in effect, another adjustment would result. With the release of
PPI data for December 2012 in mid-January 2013 and the release of
ECI data for the fourth quarter of 2012 in late January 2013,
replacing the December 2011 / fourth quarter 2011 values in the
table with December 2012 / fourth quarter 2012 values would yield
the updated escalation amount.
Pitfalls to avoid
- Vague citation of "the Producer Price Index" rather
than a reference to a specific index by its title and identifying
code. See guideline (3).
- Citation of the All Commodities index or the Industrial Commodities
index rather than an index that mitigates or does not include multiple
counting. See the discussion of commodity indexes in the Appendix.
- Use of unofficial estimates derived using rebasing factors
rather than relying on official BLS data. See guideline (8).
- Ambiguous references to dates. See guideline (5).
- Lack of a provision for a successor index should the designated
index be dropped from the PPI program, or become temporarily unavailable.
See guideline (6).
- Locking indexes to a specific base period. See guideline
- Using ambiguous terms. For example, referring to "actual"
indexes. See guideline (7).
Appendix: An Overview of PPI Classification
Final Demand-Intermediate Demand (FD-ID) Indexes
The PPI FD-ID structure measures price change for goods, services, and
construction sold to final demand and to intermediate demand. The
FD-ID system replaced the PPI stage-of-processing (SOP) system as PPI's
primary aggregation model with the release of data for January 2014.
The FD-ID system expands coverage in its aggregate measures beyond that
of the SOP system through the addition of services, construction, exports,
and government purchases.
FD-ID indexes are constructed from commodity-based producer output price
indexes. These commodity-based output price indexes are allocated to
aggregate categories based on proportions of use by type of buyer. The
main source of data used to determine buyer type is the table
titled “Use of commodities by industries, before redefinition” from the
Benchmark Input–Output Data Tables of the United States, produced by
the U.S. Bureau of Economic Analysis (BEA). The two primary classes of
buyers included in the FD–ID system are final demand (personal
consumption, capital investment, government, export) and intermediate
demand (business purchases, excluding capital investment). In many
cases, the same commodity is purchased by different buyer types, so
commodities are often included in several FD–ID indexes. 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, reflecting sales to all types of buyers. It is this
index that is used in all FD–ID aggregations, regardless of whether the
gasoline is sold for personal consumption, as an export, to government,
or to businesses, with differences accounted for in the applicable weights
to each aggregate FD or ID index. In some cases, buyer type is an important
price determining characteristic, and results in commodity indexes being
created on that basis. For example, within the PPI category for loan
services, separate indexes for consumer loans and business loans were
constructed. In this case, the commodity index for consumer loans would be
included in the final demand index and the commodity index for business
loans would fall under intermediate demand.
For more information relating to the construction of the FD-ID system,
see "A new, experimental
system of indexes from the PPI program" in the February 2011 Monthly Labor
Review, or visit the web page documenting the FD-ID Aggregation System.
More information about overall PPI methodology is available from the PPI chapter of the
BLS Handbook of Methods.
The final demand portion of the FD-ID system measures price change for
commodities sold as personal consumption, capital investment, government
purchases, and exports. The system is composed of six main price indexes:
final demand goods; final demand trade services; final demand transportation
and warehousing services; final demand services excluding trade,
transportation, and warehousing; final demand construction; and overall
The final demand goods index measures price change for both unprocessed and
processed goods sold to final demand. Fresh fruit sold to consumers and computers
sold as capital investment are examples of transactions included in the final
demand goods price index. The final demand trade services index measures changes
in margins received for the retailing and wholesaling of merchandise sold to final
demand, generally without transformation. (Trade indexes measure changes in margins
received by wholesalers and retailers.) The final demand transportation and warehousing
services index tracks price change for transportation of passengers, as well as,
transportation of cargo sold to final demand, and also includes prices for warehousing
and storage of goods sold to final demand. The final demand services less trade,
transportation, and warehousing index measures price change for all services other
than trade and transportation sold to final demand. Publishing, banking, lodging, and
health care are examples of these services. The final demand construction index tracks
price change for new construction and maintenance and repair construction sold to final
demand. Construction of office buildings is an example of a commodity that would be
included in the final demand construction index. Lastly, the overall final demand index
tracks price change for all types of commodities sold to final demand by combining the
five final demand component indexes described above.
The intermediate demand portion of the FD-ID system tracks price change for goods,
services, and construction products sold to businesses as inputs to production, excluding
capital investment. The system includes two parallel treatments of intermediate demand.
The first treatment organizes intermediate demand commodities by type. The second organizes
intermediate demand commodities into production stages, with the explicit goal of developing
a forward-flow model of production and price change.
Intermediate demand by commodity type
The intermediate demand by commodity type
treatment within the FD-ID system organizes commodities by similarity of product. The system
is composed of six main price indexes: unprocessed goods for intermediate demand; processed
goods for intermediate demand; intermediate demand trade services; intermediate demand
transportation and warehousing services; intermediate demand services less trade,
transportation, and warehousing; and intermediate demand construction. The grouping for
processed goods for intermediate demand is equivalent to the SOP grouping for intermediate
materials, supplies, and components, and the grouping for unprocessed goods for intermediate
demand corresponds with the SOP grouping for crude materials for further processing.
The unprocessed goods for intermediate demand index measures price change for goods that have
undergone no fabrication and are sold to businesses as inputs to production. Crude petroleum
sold to refineries is an example of an unprocessed good sold to intermediate demand. The processed
goods for intermediate demand index tracks price change for fabricated goods sold as business
inputs. Examples include car parts sold to car manufacturers and gasoline sold to trucking
companies. The index for trade services for intermediate demand measures changes in margins
received for the services of retailing and wholesaling goods purchased by businesses as inputs
to production. The intermediate demand transportation and warehousing index measures
price change for business travel, as well as, transportation and warehousing of cargo sold to
intermediate demand. The intermediate demand services less trade, transportation, and warehousing
index tracks price change for non-trade and non-transportation services purchased by firms as inputs
to production. Legal and accounting services purchased by businesses are examples of intermediate
demand services excluding trade, transportation, and warehousing. Finally, the construction for
intermediate demand index measures price change for construction purchased by firms as inputs
to production. Since new construction is categorized in the final demand portion of the economy
as capital investment, the construction for intermediate demand index tracks price change for
maintenance and repair construction purchased by firms.
Intermediate demand by production flow
The production flow treatment of intermediate
demand is a stage-based system of price indexes. These indexes can be used to study price
transmission across stages of production and final demand. This system is constructed in a manner
that maximizes forward flow of production between stages, while minimizing back flow of production.
The production flow treatment contains four main indexes: intermediate demand stage 1, intermediate
demand stage 2, intermediate demand stage 3, and intermediate demand stage 4.
Indexes for the four stages were developed by first assigning each industry in the economy to one
of four stages of production, where industries assigned to the fourth stage primarily produce output
consumed as final demand, industries in the third stage primarily produce output consumed by stage 4
industries, industries assigned to the second stage primarily produce output consumed by stage 3
industries, and industries assigned to the first stage produce output primarily consumed by stage 2
industries. Indexes for the stages track prices for the net inputs consumed by industries in each of
the four stages of production. For example, the stage 4 intermediate demand index tracks price change
for inputs consumed, but not produced, by industries included in the fourth stage of production.
Hence, the index measures price change in the inputs to production of industries that primarily
produce final demand commodities. The main sources of data used to develop these indexes were the
BEA tables titled “Use of commodities by industries, before redefinition” and “Make of commodities by
industries, before redefinition.”
Examples of heavily weighted goods-producing industries in stage 4 include the manufacture of light
trucks and utility vehicles, automobiles, and pharmaceuticals. Retail trade, food service and drinking
places, and hospitals are examples of heavily weighted service industries included in stage 4. Stage 4
also includes all new construction industries. Examples of goods consumed by stage 4 industries include
motor vehicle parts, commercial electric power, plastic construction products, biological products, and
beef and veal. Engineering services, machinery and equipment wholesaling, long distance motor carrying,
and legal services constitute examples of services consumed by stage 4 industries.
Examples of highly weighted goods-producing industries included in stage 3 are motor vehicle parts
manufacturing, animal (except poultry) slaughtering and processing, and semiconductor manufacturing.
Services industries classified in stage 3 include wholesale trade; insurance carriers; architecture,
engineering, and related services; and hotels and motels. Examples of goods consumed by stage 3
industries include slaughter steers and heifers, industrial electric power, and hot rolled steel bars,
plates, and structural shapes. Services commonly consumed by stage 3 industries include commissions from
sales of property and casualty insurance, business loans, temporary help services, and administrative
and general management consulting services.
Petroleum refineries; electricity generation, transmission, and distribution; natural gas distribution;
cattle ranching and farming; and plastic materials and resin manufacturing are among the goods-based
industries assigned to stage 2. Services industries that are heavily weighted in stage 2 include
management of companies and enterprises; non-depository credit intermediation and related activities;
insurance agencies, brokerages, and related activities; and services to buildings and dwellings. Goods
commonly purchased by stage 2 industries include crude petroleum, natural gas, formula feeds, and primary
basic organic chemicals. Services that are heavily weighted in the intermediate demand stage 2 index are
legal services, business loans, and cellular phone and other wireless telecommunication.
Goods producing industries in stage 1 include oil and gas extraction, paper mills, and grain farming.
Real estate, legal services, and advertising services are examples of highly weighted services industries
included in stage 1. Examples of goods consumed by stage 1 industries are commercial and industrial electric
power and gasoline. Services commonly consumed by stage 1 industries include solid waste collection,
chemicals and allied products wholesaling, and guestroom or unit rental. All inputs purchased by stage 1
industries are by definition produced either within stage 1 or by latter stages of processing, leaving
stage 1 less useful for price transmission analysis.
See industry stage assignments for more
In addition to the FD-ID structures described in the prior sections, a number of supplemental indexes have
been developed in order to provide data users with index groupings not available through the primary FD-ID
structures. Some examples of these special grouping indexes include:
Final demand less foods, energy, and trade services
Final demand goods plus final demand distributive services
Final demand distributive services
Total finished (the personal consumption and private capital investment portion of final demand)
Government purchased goods
Government purchased services
Personal consumption goods plus personal consumption distributive services
Processed energy goods
Processed foods and feeds
Processed materials less foods and energy
Processed goods plus intermediate distributive services
Unprocessed foodstuffs and feedstuffs
Unprocessed energy materials
Unprocessed nonfood materials less energy
Total goods inputs to stage 4 intermediate demand
Total services inputs to stage 4 intermediate demand
Total goods inputs to stage 3 intermediate demand
Total services inputs to stage 3 intermediate demand
Total goods inputs to stage 2 intermediate demand
Total services inputs to stage 2 intermediate demand
To view the complete set of indexes included in the FD-ID system, see tables 1, 2, and 3 of the
PPI News Release.
The commodity classification structure of the PPI organizes products by similarity
of end use or material composition, regardless of their industry of origin. This
system is unique to the PPI and does not match any other standard coding structure,
such as the NAICS or the U.N. Standard International Trade Classification (SITC).
The historical continuity of index series, the needs of index users, and a variety
of ad-hoc factors were important in developing the PPI commodity classification.
Prior to January 2009, the commodity classification system included only goods-based
price indexes. With the release of data for January 2009, PPI expanded the commodity
classification structure to include services and construction products. Table 9 of
the PPI Detailed Report includes data for
commodity indexes, organized in a hierarchal structure, including major groupings,
subgroups, product classes, sub-product classes, and individual items.
The commodity classification system is organized as a hierarchical structure that
starts with major commodity groupings (2-digit level of aggregation). Major groupings
01 through 15 encompass commodity-based goods indexes. Major groupings 30 though 61
include services-based commodity indexes, and major group 80 encompasses
construction-based commodity indexes. Each major commodity grouping includes
(in descending order of aggregation) subgroups (3-digit level), product
classes (4-digit level), subproduct classes (5- and 6-digit level), item
groupings (7-digit level), and individual items (8-, 9-, and 10-digit levels).
Unlike many FD-ID indexes, some of the traditional commodity grouping indexes,
such as the All Commodities index, the Industrial Commodities index, and 2- and
3-digit commodity grouping indexes, exhibit a multiple counting bias in reflecting
price changes. In brief, multiple-counting bias means that price changes for
components that go through many stages of processing have an excessive influence on
aggregate index series. This problem is common among highly aggregated PPI commodity
groupings because they are calculated from price changes of commodities at several
stages of the production process, where each individual price change is weighted by
its total gross value of shipments in the weight-base year. This problem occurs
because many products go through successive stages of fabrication or processing and
have their price changes counted separately at each stage. The indexes for final
demand, intermediate demand by production flow, and the net output of industries
and industry groups eliminate the defect of multiple counting of price changes,
while the intermediate demand by commodity type indexes mitigate, but do not
eliminate, this defect.
To illustrate the multiple-counting problem, suppose that the price of cotton rises
sharply. If the price increase is passed through by spinners of cotton yarn and
thread, then by weavers of gray cotton fabric, then by producers of finished cotton
fabric, and, finally, by shirt manufacturers, the single price increase for the raw
material cotton would have been included five times in the All Commodities index and
four times in both the Industrial Commodities index and the major commodity grouping
index for textile products and apparel. Inasmuch as prices throughout the economy
are always changing at different rates, multiple counting can result in rates of
change for aggregated price indexes that are highly misleading, because prices of
raw materials tend to be more volatile than prices of final demand goods and because
gross output values are used as weights for major commodity groups. Specific, detailed
commodity indexes, such as 6- and 8-digit commodity-based PPIs, and many 4-digit
commodity codes, are effectively free of this multiple-counting defect.
A Producer Price Index for an industry is a measure of changes in prices received for
the industry’s output sold outside the industry (that is, its net output). Measures
of price change classified by industry form the basis of sampling and data collection
within the PPI. These indexes reflect the price trends of a constant set of goods
and services that together represent the total output of an industry. Standardized
industry-based index codes provide comparability with a wide assortment of
industry-based data for other economic phenomena, including productivity,
production, employment, wages, and earnings.
For about 25 years (from the late 1970s through 2003), the PPI program made use of
the Standard Industrial Classification (SIC) system as the structure for the
collection and presentation of industry-based price data. However, the SIC system
received increasing criticism about its inability to handle rapid changes in the
U.S. economy. Developments in information services, new forms of health care,
expansion in services, and high-tech manufacturing are examples of industrial
changes that could not be studied adequately under the SIC system.
The PPI program began publishing industry-based price data organized in accordance
with the North American Industry Classification System (NAICS) with the release of
data for January 2004. Developed in cooperation with Canada and Mexico, NAICS
represents one of the most profound changes in statistical programs focusing on
emerging economic activities. NAICS uses a production-oriented conceptual framework
to group establishments into industries on the basis of the primary activity in
which they are engaged. Establishments using similar raw-material inputs, similar capital
equipment, and similar labor are classified under the same industry. The industry within
which an establishment is classified is determined by those products which account
for the largest share of the establishment’s total value of shipments.
In addition to aggregate indexes tracking price changes for groups of industries
and industries as a whole, in general, there may be as many as three kinds of product
level indexes for categories within a given industry. Every industry has primary
product indexes that show changes in prices received by establishments in the
industry for the various products made primarily, but not necessarily exclusively,
by that industry. For contracting parties looking to use industry based PPIs for
escalation purposes, these indexes, which directly relate to the various types
of primary production of an industry, are more appropriate for use in contracts.
Two examples of primary production are cranes produced by construction machinery
manufacturers (NAICS 333120), and financial auditing done by offices of certified
public accountants (NAICS 521211). In addition to indexes for primary products of
industries, most industries have secondary product indexes that show changes in
prices received by establishments within an industry for products made chiefly by
other industries. Some examples include mining machinery production and the selling
of scrap done by construction machinery manufacturers, as well as management
consulting services performed by accounting firms. Finally, some industries have
miscellaneous receipts indexes that show price changes for other sources of revenue,
such as resales of purchased products or collection of rents. Indexes for secondary
products and miscellaneous receipts generally are not considered appropriate for
contract escalation, since they reflect an undefined basket of goods or services.
It is suggested that contracting parties looking for a high-level index for a
specific industry consider using the industry’s primary products aggregate
index, which brings together the various products that constitute the primary
production of that industry into a single aggregate index.
See, Highlights of the 2013 PPI User Survey, Bureau of Labor Statistics, Beyond the Numbers, August 2013, Volume 2, No. 20, Joseph Kelley and Antonio Lombardozzi.
Data requests and technical questions concerning the PPI may be addressed to the PPI Section of Index Analysis and Public Information. They can be reached at telephone number 202-691-7705, or by e-mail at (email@example.com). Please refer to the desired series by title and code, exactly as cited in the contract.
The Employment Cost Index (ECI) is based on a quarterly survey typically published in the month that follows the completion of the calendar quarter. Because the ECI has relatively little industry detail, data users may have to use a higher level of aggregation than they do with PPI data. However, the Employment Cost Index is a highly useful measure of labor costs because it covers all workers (not just production and nonsupervisory workers) and because it includes not only wages and salaries but also employer costs for employee benefits. Like the PPI, the ECI is a fixed-weight index and is not influenced by employment shifts among industries and occupations with different wage and benefit levels. But unlike the PPI, ECI data are final when they are first published and are not subject to revision (except on a seasonally adjusted basis). The ECI Website is located at http://www.bls.gov/ncs/ect/, and they can be reached over the phone at 202-691-6199.
From the seller's point of view, a contract which escalates the price of a product based on the change in the PPI for that same product might not provide an appropriate basis for changing the base price. If most companies reporting a product's price to BLS employed escalation clauses using the PPI for that same product, these firms would be unable to raise their prices until the PPI advanced; however, there could be no advance in the PPI until the companies were able to raise their prices. From the buyer's point of view, a reverse circularity is evident when the price of a product purchased is escalated by the PPI for the same product. A rise in the contract price may be reflected in a rise in the PPI, which would trigger yet another rise. In summary, contract escalators generally are put in place to cope with input cost volatility from the sellers’ side of the transaction. Under certain conditions, sellers may not be able to provide the agreed to product or service if large increases in input costs are not mitigated. Similarly, buyers may feel little incentive to lock in a price over time of they perceive that a drop in input costs accrues only to the seller as a windfall.
Sometimes, however, government agencies, laws, or regulations stipulate which index or level of detail must be cited.
As an example of PPI practices, first-published PPI data for December 2012, as well as final data for August 2012, were released on January 15, 2013. Final data for December 2012 were released on May 15, 2013 with the first release of data for April 2013. Final data for all indexes appear in the recalculated index column of each table in each issue of the PPI Detailed Report, and are available online through LABSTAT. Contracting parties who want to use other BLS series for escalation in addition to PPIs should be aware that each BLS program has its own revision and correction policies.
Most of the new FD-ID indexes have an index base of November 2009=100 or April 2010=100. However, the goods-based indexes of the FD-ID system that correspond with the previous SOP model have an index base of 1982=100. Some commodity-type indexes also have an index base of 1982=100, but other commodity-type indexes, as well as all of the industry-based indexes, have their base period set equal to the month and year of their introduction.
Last Modified Date: February 19, 2014