Bureau of Labor Statistics
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Escalation and Producer Price Indexes: A Guide for Contracting
Business firms in search of effective methods of coping with inflation
often employ price adjustment (escalation) clauses in long-term sales and
purchase contracts. A conservative estimate is that contracts with a
lifetime worth of $200 billion 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 in general and for
particular products, free from possible manipulation by either of the
contracting parties, the producer price indexes calculated by the Bureau
of Labor Statistics (BLS) are widely recognized among business people,
economists, statisticians, and accountants as useful in price adjustment
This report provides guidance on the development of escalation clauses
in contracts which 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 report is based upon
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 Bureau does not encourage or
discourage the use of price adjustment measures in purchase and sales
agreements. The Bureau does not directly assist in writing contracts nor
does it provide advice on disputes arising from contract interpretation.
Because index methodology and publication conventions could be crucial in
developing escalation clauses, this report is intended to alert users to
potential problems arising in these areas. 2
This report 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 upon the guidelines discussed, along with an
example of the price adjustment calculations that would be needed to
implement these provisions.
The structure of producer price indexes
Producer price indexes measure the average change in prices received by
domestic producers of commodities in all stages of processing. A PPI is an
output price index, that is, it measures price changes received by
manufacturers of a product. It is neither a buyer's index nor an input
price index, that is, it does not measure the cost of producing that item.
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 about 100,000 quotations,
resulting in publication of over 10,000 different indexes each month.
Indexes are organized in three major structures:
(a) Stage of processing (SOP) -- products are organized by class of
buyer and degree of fabrication, that is, finished goods, intermediate
goods, and crude goods;
(b) Industries and their products -- products are organized by
producing industry as defined in the North American Industry
Classification System (NAICS); and
(c) Type of commodity -- products are organized by similarity of
end-use or material composition.
(For a more detailed description of these three index structures, see
Indexes are available at different levels of aggregation and detail
within each of the three major structures. There are broad SOP, industry,
and commodity groupings, and there are indexes for specific product groups
or individual items, for example, electronic components, diesel fuel, or
Guidelines for developing escalation clauses
(1) Establish the base selling price subject to escalation.
The item whose price is 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 or year of
this base selling price; this time period is often called the base period.
Indicate the length of time it will remain in effect. (Note that BLS no
longer publishes any dollar unit prices for any item within the PPI
(2) Select an appropriate index or indexes.
The Finished Goods Price Index may best indicate the general trend of
inflation for goods sold in primary markets. The PPI for finished goods
excluding foods may be more appropriate for users wishing to exclude the
effects of volatile movements in food prices. The Intermediate Materials
Price Index or the Crude Materials Price Index may best indicate price
trends for semifinished or raw materials in general. Again, indexes
excluding food-related materials may be more appropriate for many
applications. Indexes for commodities or detailed commodity groupings may
best indicate price trends for specific commodities.
Contracting parties may want to escalate the base price of a product by
a single PPI series. Often, however, users may prefer to escalate on the
basis of several data series, including some 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
Contracting parties should choose an index or 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 is
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 than to a PPI for a type of finished fabric. Otherwise,
the parties may find themselves in a serious problem that could be
difficult to escape from. 4
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. Contracts should
provide for these contingencies, and may minimize them if they cite a
commodity index that does not go below the 4-or 6-digit level of detail,
or a product code (industry-oriented) index that does not go below the
7-digit level. 5
Even with the PPI program's full coverage of the mining and
manufacturing sectors, not all products are included directly in the
sample or published in the PPI system. Sometimes indexes must be chosen as
proxies to estimate the price movements of materials or products.
(3) Clearly identify the selected index and cite an appropriate
The escalation clause of a contract should identify the index selected
by its complete title and any identifying code.
Please note that there is no single index entitled "The Producer Price
Index." The term "Producer Price Index" refers to a family of indexes
compiled by the Bureau of Labor Statistics. A specific index should be
cited 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 BLS source of PPI data in print is the
monthly periodical, PPI Detailed Report. It contains all indexes
and is mailed to subscribers approximately 1 month after the initial
release of each month's data.
Current PPI data in print may also be obtained from the "Summary
Data from the Producer Price Index News Release," and the Monthly Labor
Review (MLR). The "Summary Data from the Producer Price Index News
Release" is available without charge and is mailed within 2 weeks of the
release date; however, it contains only a limited number of indexes. The
MLR contains aggregate rather than detailed PPI data and is mailed long
after the PPI data are first available. The MLR may still be a convenient
data source if a very broad aggregate PPI category is called for,
other BLS series are also included in the escalation provision, and
quick availability of data is not necessary.
Contracting parties should not cite table numbers and/or table titles
in their escalation contracts because 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
accept updated index values on the telephone from BLS staff
members, the escalation clause should specify appropriate procedures and
whether subsequent verification from a published source is necessary.
In 1995, the BLS began posting PPI series, news releases, and technical
information to both a World Wide Web site (http://www.bls.gov/ppi/) and a file
transfer protocol site (ftp://ftp.bls.gov/pub/time.series/).
During the years following the introduction of PPI internet services,
usage of these sites eclipsed more traditional methods of data
dissemination, such as subscriptions to the PPI Detailed Report.
For example, there were over 1.6 million accesses of PPI series during the
12 months ended December 31, 2003.
(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
(5) State the frequency of price adjustment.
The escalation clause should specify whether price adjustments are to
be made at fixed intervals, such as quarterly, semi-annually, or annually,
or only at the expiration of the contract. To conform to the procedure
described in guideline (9), price adjustments have to 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 will be encountered with those contracts which 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. In this case, or for any other case that does not cite a
specific time interval, problems will arise unless the designated
procedure corresponds with the version of the data to be used, and the
date on which the price adjustments will be made. Guideline (7) expands
upon these issues.
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 date of the month. Avoid
wording such as "the index for aluminum mill shapes as of September 30,"
since several different and equally plausible interpretations are possible
for such language. It could mean the index that was available on September
30, which would be the August figure; it could mean the September index;
or it could mean the October index, since the September index would be
based on information supplied to BLS before September 30.
(6) Provide for missing or discontinued data.
Occasionally any given 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 Producer Price Index for mine roof
bolts, code 10-81-02-41 was temporarily discontinued from July 1986 to
December 1987; during that period, contracting parties had to use data for
the product class coded 10-81-02, or some other series of their choosing.
Escalation clauses should provide procedures to be used when required data
Sometimes an index is permanently discontinued when a commodity
declines in market importance; this most commonly occurs as a result of
periodic resampling by BLS of industries and their output. Escalation
clauses may provide for successor indexes if original indexes are
discontinued, or for contracting parties to renegotiate a successor index.
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, presumably, should not
necessitate any contract renegotiation. The monthly periodical PPI
Detailed Report routinely provides lists of recoded indexes each time
there is a sample change; normally, these lists appear in the January and
July issues each year.
(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 that contracting parties explicitly agree
on the date the price adjustment calculations are to be made.
Adherence to this principle and its implications should prevent many
potential problems. Contracts which 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 corrected.
Among other advantages, following guideline (7) should resolve any
ambiguities arising due to the fact that all PPI data are routinely
subject to revision once and only once, 4 months after their 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 often are 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, and rebasing -- a separate matter addressed in guideline
(8)). It is not appropriate to refer to the first-published version of a
PPI as "preliminary," and neither the first-published nor the final
version of a PPI should be labeled "actual," a term that might mean
different things to different contracting parties and which has no
official meaning in PPI terminology. 6
To follow guideline (7) effectively, it is essential to specify the
date on which the price adjustment is to be made. Currently, PPI data are usually first published in or around the third week of the month following the reference month in question. Thus, the earliest time for price adjustment that a contract ought to specify needs to be after the third week of the month following the designated data month. All
first-published indexes for a given month, as well as final indexes for
the fourth previous month, are considered officially published and are
available on the day of release of those data, even though most indexes
will not appear in print in the PPI Detailed Report until
several weeks later. The contracting parties' selection of the date on
which the price adjustment is to be made should be made only after they
have agreed on, first, the reference month and, second, on whether their
calculations are to be based upon the first-published version or the final
version of that month's index. The date for calculating the price
adjustment can then be selected so that the desired data will be
It is vital to address these matters before a contract is ready
for signature. Otherwise, disagreements may arise when the first-published
and final versions of the selected index are different, and there will be
no criterion for selecting either version.
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. If this is the case, the
final version of the data should be specified whenever feasible, because
only final data will be rebased retroactively whenever BLS may
update the PPI reference base.
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. That is, what should
not be written into the contract is language such as the following:
"Divide the current index value by 103.9 (which is the value of the index
for the base period January 1990) and then......." Rather, it should be
written: "Divide the current index value by the index value for January
1990, which represents the base period, and then......." Contract clauses
which incorporate specific index values will become problematic when the
PPI reference base is later changed by BLS; the index value
incorporated into the contract will be incompatible with current official
data after BLS has implemented the rebasing. (Guideline (8) discusses
reference base issues.)
(8) Avoid locking indexes used for escalation into any particular
reference base period.
Contracting parties should simply follow the principle of guideline (7)
by calculating percent changes using indexes expressed on the reference
base period in effect when the contract escalation is carried out. For
example, if a contract called for a price adjustment to be made in
December 1987 (just prior to the rebasing that became effective on
February 12, 1988), then indexes expressed on the old reference base of
1967 = 100 would be used. In general, relying upon a new index reference
base period as set by BLS should not affect calculations (except for
rounding differences), as long as all percent changes are derived solely
from indexes expressed on the official base period. Because rounding may
indeed make a substantial difference when the dollar amount of a contract
is very large, it will be doubly important for such contracts to rely only
upon official data on the current base as determined by BLS.
Comprehensive base period changes in the PPI system have been routine
although infrequent. The switch to the current standard reference base
period of 1982 = 100 in early 1988 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. In the past, the
standard reference base period was updated roughly every 10 years. 7
When the new 1982 = 100 standard reference base was adopted, BLS
advised contracting parties and other PPI data users to calculate index
percent changes using officially rebased data. As with all other changes
to new standard reference base periods, BLS had taken all PPI final data
that had been expressed on the 1967 base and officially released these
figures retroactively on a 1982 base. Tables of official historical data
for each PPI series from its beginning to the present on a
consistent 1982 = 100 base were, and are, readily available from BLS on
Official PPI data for current time periods are not available on
previous reference bases after a base change has been implemented by BLS.
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.
Rebasing factors are only made available by BLS to convert data on the
current standard reference base period to the immediately preceding one.
Thus, for example, there are no official rebasing factors to convert data
on the 1982 = 100 base back to 1957-59 = 100 base.
Rebasing is not considered "revising," because the relative movements
of any series over time are not affected. Users must recognize that 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 already specify use of originally published
indexes, particularly since this was recommended by BLS in the September
1979 escalation report (BLS Report 570). BLS is now strongly
discouraging such language in escalation contracts, in accordance with
guideline (7) recommending that the latest available version of index data
be used. In addition, BLS does not maintain records for
originally-published indexes. As a result, no official rebased versions of
such originally published indexes exist.
(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 that calculated
for the selected PPI. To illustrate, suppose that the contract escalation
clause refers to the Finished Goods Price Index. Also suppose that the
Finished Goods Price Index was 110.0 when the base price was set. A year
later when the first adjustment is made, the figure is 115.5. This
represents an increase of 5.0 percent in the Finished Goods Price
Index as shown.
Index at time of calculation ................................... 115.5
Divided by index at time base price was set .............. 110.0
Equals ......................................................... 1.050
This means that the base price should be increased by 5.0 percent. To
Base price ..................................................... $1,000
Multiplied by ............................................ 1.050
Equals adjusted price .......................................... $1,050
In later years, this procedure would be applied again by taking the
current index value and subtracting from it the index value at the time
the base price was set, and then proceeding just as described above.
(b) Escalation of a portion of the base price. Another procedure
sometimes employed changes the base price so that only part of it is
escalated by a selected PPI, while the balance remains fixed. This may be
done by changing the base price by a certain dollar amount for each
1-percent movement in the selected index.
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, simply divide the designated variable portion of
the base price ($700) by 100, which in this case would yield $7. The
escalation clause is written so that it provides that the base price of $
1,000 shall change $7 for each 1-percent movement in the index.
Using this approach, the base price would rise to $1,035.00 for a
5-percent rise in the finished goods price index as shown:
Base price ..................................................... $1,000.00
Plus 5.0 times $7 ........................................... 35.00
Equals adjusted price .......................................... $1,035.00
(c) Index points. Relatively few escalation clauses which rely
on PPI data adjust contract prices on the basis of changes in index
points. (In the earlier example, the index-point change would be 5.5.)
When prices are adjusted by a percentage on the basis of a change in index
points, the value of an index point will fall in percentage terms as the
index level rises, and vice versa. For example, a 1-point increase in an
index from 105.5 to 106.5 represents an advance of 0.9 percent, but a
1-point increase from 205.5 to 206.5 represents an upward movement of only
0.5 percent. Conversely, a 0.9-percent increase in an index of 205.5 would
raise the index 1.8 points to 207.3.
Thus, if the base price is adjusted by a dollar amount according to a
change of index points, the procedure is then vulnerable to changes in the
index base period. Index point values would differ for an index rebased to
a later year or expressed on a 1967 = 100 base.
In contrast, adjusting a base price by a percentage change in an index,
as in approaches (a) and (b) above, will not result in these
(d) Composite indexes. Some contracts describe construction of a
composite index based on several PPI 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 will 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. Composite indexes constructed by
the contracting parties are not official BLS data.
One procedure for specifying a composite index is illustrated by the
(i) Choose the indexes that will represent the different costs involved
in producing the item (such as a fuels index, a machinery index, or
whatever is appropriate);
(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 list of chosen weights should sum to 100 percent.
(iii) Clearly specify the time period that these relative weights are
supposed to represent. The weights should be chosen to represent the time
period associated with the base price. (This will be referred to as the
(iv) The first step necessary for the calculation of the special index
is to rebase all of the original index data to the contract's base period.
This is done for each series by dividing the indexes by the index value
for the base period, and then multiplying the result by 100. (For this and
following steps, note the detailed example at the end of this report.)
(v) Then derive values for the composite index by multiplying the
relative weights by the rebased index values for each index series and
summing the results. (This calculation must be done for each month, or
other time period, needed for determining the current adjustment.)
(vi) Using the composite index values created in step (v), calculate
the current adjustment in standard fashion, that is, by using the
procedure described in (a).
(e) Limits for price adjustment. Escalation clauses sometimes
contain a floor, a ceiling, or both, to limit the total price
adjustment during the life of the contract. If the upper or lower limit is
reached, the parties may renegotiate prices for the duration of the
contract. Some contracts specify that no price adjustments are to be made
until a minimum change in the selected index has taken place. Contracts
may also provide that an escalation is to apply in both an upward and
downward direction, or in one direction only .
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 which will adjust the selling price once a year to
account for changes in labor and materials costs. The following is an
example of the terms which might be incorporated into such an escalation
clause. The example assumes the use of the special index method, discussed
in section (d) of guideline (9).
(A) The base selling price for a lot of 10,000 type A widgets is set at
$768,450.00 as of December 1989, to remain in effect for 1 year. December
1989 is hereafter called the reference base period.
(B) The base selling price shall be adjusted in accordance with the
percent changes of the special index which is described in (D) below. The
special index shall be derived from the following index series:
(i) The Employment Cost Index for total compensation, durable goods
manufacturing, not seasonally adjusted, as it appears in the
periodical Monthly Labor Review as published by the U.S. Department
of Labor, Bureau of Labor Statistics; this series shall be referred to as
the labor index.
(ii) The Producer Price Index for special industry machinery and
equipment, commodity code 116, not seasonally adjusted, as it appears
in the PPI Detailed Report as published by the U.S. Department of
Labor, Bureau of Labor Statistics; this index shall be referred to as the
materials index; and
(iii) The Producer Price Index for number 2 diesel fuel,
commodity code 057303, not seasonally adjusted, as it appears in the
periodical, PPI Detailed Report as published by the U.S. Department
of Labor, Bureau of Labor Statistics; this index shall be referred to as
the fuels index.
(C) The selling price shall be adjusted on February 20 of each
subsequent year, based upon the percent changes (whether up or down) in
the special index specified below, between the reference base period
December 1989 and December of the most recent year. All calculations for
the special index shall be based upon the latest versions of the Producer
Price Index and Employment Cost Index data published as of February 20
(D) The special index shall be derived in the following manner:
(i) The values for the current period for each of the three BLS index
series specified in (B) above shall be rebased to the reference base
period December 1989; this shall be done by dividing the current value of
each index by its value for the reference base period, and then
multiplying the result by 100.
(ii) The rebased labor index shall be assigned a relative weight of
forty (40) percent; the rebased materials index shall be assigned a
relative weight of forty (40) percent; the rebased fuels index shall be
assigned a relative weight of twenty (20) percent; these relative weights
represent the base period of December 1989.
(iii) Multiply the rebased current value for each of the three indexes
by its relative weight.
(iv) The sum of these three figures shall be the value of the special
index for the current time period;
(v) Multiply the current value of the special index by the original
base price, and then divide by 100; 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 immediately preceding November, October, or
September, whichever is the most recent month which has published data,
shall be used as the basis for adjustment of the materials and fuels
indexes. If no ECI or PPI data have been published for those months, then
the contracting parties shall agree upon substitute series by February 20.
With these terms in effect, table 1 shows some hypothetical data and
calculations which might have been made on February 20, 1991 to determine
the new selling price for a set of 10,000 type A widgets as of December 1,
Table 1. Example of calculation procedures
|Base price = $768,450
|Current period series values (December 1990)
|Divide by the base period series values (December 1989)
|Multiply by 100 to yield the converted series values
|Multiply by assigned weight (Labor 40%, Materials 40%, Fuels
|Add the three figures to get the current value (December 1990)
for the special index
|Multiply by original base price ($768,450)
|Divide by 100 to yield the adjusted price
Pitfalls to avoid
- Vague citation of "the Producer Price Index" rather than a reference
to a specific index by its title and any identifying code number. See
- Citation of the all commodities index or the industrial commodities
index rather than an index that does not include multiple counting of
price changes. See the discussion of commodity indexes in the
- Use of unofficial estimates derived from rebasing factors rather
than relying upon official BLS data. See guideline (8).
- Ambiguous reference to dates ("index as of May 30"). See
- Lack of a provision for a successor index should the designated
index be dropped from the PPI program, or if it should become
temporarily unavailable. See guideline (6).
- Locking index into a specific base period. See guideline (8).
- Using ambiguous terms. For example, referring to "actual" indexes.
See guideline (7).
Appendix: Three Index Structures: A Brief Overview
Stage of Processing (SOP) indexes
The Finished Goods Price Index measures price changes for goods that
will not undergo further processing and are ready for sale to the final
demand user, either an individual or a business firm. Consumer foods
include unprocessed foods such as bakery products and meats. Other
finished consumer goods include durable goods such as automobiles,
household furniture, and appliances, and nondurable goods such as apparel
and home heating oil. Capital equipment includes producer durable goods
such as heavy motor trucks, tractors, and machine tools.
The stage-of-processing category for intermediate materials, supplies,
and components consists in part of commodities that have been partly
processed but require further processing. Examples of such semifinished
goods include flour, cotton yarn, steel mill products, and lumber. The
intermediate goods category also encompasses nondurable, physically
complete items purchased by business firms for their operations. Examples
include diesel fuel, belts and belting, paper boxes, and fertilizers.
Several sub-category indexes are available, such as an index for
intermediate goods less foods and energy.
Crude materials for further processing are products entering the market
for the first time that have not been manufactured or fabricated and that
are not sold directly to consumers. Crude foodstuffs and feedstuffs
include items such as grains and livestock. Examples of crude nonfood
materials include raw cotton, crude petroleum, coal hides and skins and
The entire output of various industries is sampled to derive price
indexes for the net output of industries and their products. Such indexes
are grouped according to the NAICS and Census product code extension of
the NAICS. Industry price indexes are compatible with other economic time
series organized by NAICS codes, such as data on employment, wages, and
productivity. This is especially convenient if indexes reflecting cost
inputs other than PPIs also are used in the escalation procedure.
The commodity classification structure includes 15 major groups. This
scheme of organization evolved over many years; its greatest usefulness is
the availability of a large amount of historical data. The coding system
used for these indexes is unique to the PPI program; no other governmental
statistical program uses it. Commodities are grouped according to
similarity of material composition and end use, regardless of the industry
Unlike SOP indexes, some of the traditional commodity grouping indexes
such as the all commodities index and the industrial commodities index
exhibit a multiple counting problem in reflecting price changes. This
occurs because many products go through successive stages of fabrication
or processing and have their price changes counted separately at each
stage. SOP indexes largely offset the defect of multiple counting of price
Multiple counting of price change can arise as follows: Suppose that a
price for steel scrap results in an increase in the price of steel sheet
and then an increase in the price of automobiles. The all commodities
index would increase as a result of all three changes, whereas the typical
end-use purchaser would only note the price increase for automobiles. The
grouping of products by stage of processing eliminates double counting of
commodity price changes as they pass through different stages. The SOP
structure would reflect the increase in the price of steel scrap only in
the Crude Materials Price Index, the rise in steel sheet only in the
Intermediate Materials Price Index, and the rise in automobile prices only
in the Finished Goods Price Index.
1 See, The BLS Industrial Price
Program: A Survey of Users , Report 509 (Bureau of Labor Statistics,
2 Data requests and technical
questions concerning the PPI may be addressed to: Section of Index
Analysis and Public Information, Division of Industrial Prices and Price
Indexes, Office of Prices and Living Conditions, Bureau of Labor
Statistics, Room 3840, 2 Massachusetts Avenue NE, Washington, DC 20212.
PPI staff can also be reached at telephone number 202-691-7705, or by
e-mail at (firstname.lastname@example.org). Please refer to the desired series by title
and code number, exactly as cited in the contract.
3 The Employment Cost Index (ECI) is
based upon a quarterly survey and is available only for the months of
March, June, September, and December each year. Because the ECI has
relatively little industry detail at present, 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
this 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).
4 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. In those cases where most companies reporting a
product's price to BLS are tied to escalation clauses using the PPI for
that same product, these firms would be unable to raise their price until
the PPI advances; there could be no advance in the PPI until the companies
are able to raise their price. 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, etc.
5 Sometimes, however, government
agencies, laws, or regulations may dictate which index or level of detail
must be cited. If detailed indexes must be used, note that some product
indexes published in the industry structure scheme correspond to 8-digit
commodity indexes in the commodity structure system. In these cases,
movement of the latter indexes are calculated on the basis of movements of
their counterparts in the industry structure scheme.
6 As an example of PPI practices,
first-published PPI data for December 1990, as well as final data for
August, were released on January 11, 1991. Final data for December were
released on May 10, 1991 with the first release of April data. Final data
for all indexes now appear in each issue of the PPI Detailed
Report; the "Summary Data from the Produce Price Index News Release"
includes final data only for stage-of-processing groupings and certain
commodity groupings. 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.
7 For SOP and most commodity
indexes, the base year currently is 1982; indexes introduced into the
system since then are based on the month they were first calculated,
usually either December or June. Industry and product indexes currently
have no standard base but are based on the month of their first
Last Modified Date: May 16, 2008