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Handbook of Methods Producer Price Indexes Concepts

Producer Price Indexes: Concepts

The following are definitions of the key concepts used in the calculation of the Producer Price Index (PPI).

Coverage

The information that follows describes PPI coverage of the goods-producing sector. The PPI survey universe consists of the output of nearly all industries in the goods-producing sectors of the U.S. economy—mining, manufacturing, utilities, agriculture, fishing, and forestry. Recycled goods that compete with those made in the goods-producing sectors, such as waste and scrap materials, also are part of the survey. Goods shipped between establishments owned by the same company (termed interplant or intracompany transfers) are within the scope of the PPI survey, as is a substantial percentage of the domestic production of goods specifically made for the military.

The information that follows describes PPI coverage of the services and construction sectors. The output of the services sector and other sectors that do not produce physical products also are conceptually within the PPI survey universe. As of January 2023, the PPI program covered nearly 70 percent of the service sector’s output as a percentage of total sector revenue, publishing data for selected industries in the following sectors: wholesale and retail trade; transportation and warehousing; information; finance and insurance; real estate brokering, rental, and leasing; professional, scientific, and technical services; administrative, support, and waste management services; healthcare and social assistance; and accommodation. For the construction sector, selected indexes for nonresidential construction industries, maintenance and repair construction, and nonresidential construction contractor services also are published.

Prices

For industries in sectors other than wholesale and retail trade, the PPI price is defined as the net revenue accruing to a specified producing establishment from a specified kind of buyer for a specified product shipped, or service provided, under specified transaction terms on a specified day of the month. This definition points out that all price determining variables, including product descriptors, transaction terms, and type of buyer must be clarified before a cooperating business establishment can report a meaningful product or service price to BLS. This allows prices representing each type of transaction to be appropriately weighted when calculating the PPI aggregate indexes.

In contrast to all goods-producing industries and most service-providing industries, establishments engaged in wholesale and retail trade purchase goods primarily for direct resale to other businesses and consumers. The PPI views wholesalers and retailers as suppliers of distributive services (rather than goods) because little, if any, transformation of these goods takes place. This approach implies that the output of wholesale or retail trade industries is best represented by tracking the differences between selling prices of goods and their acquisition prices. PPI therefore tracks the average changes in gross margins received by wholesalers and retailers. Changes in gross margins tracked by PPIs for the wholesale and retail trade sectors reflect the value added by these establishments for services such as marketing, storing, and displaying goods in convenient locations and making the goods easily available for customers to purchase.

Because the PPI is meant to measure changes in net revenues received by producers, changes in excise taxes—revenues collected by producers on behalf of the federal, state, and local government—are not reflected in the index. Changes in rebate programs, low-interest financing plans, and other sales promotion techniques are reflected to the extent that these policies affect the net proceeds ultimately realized by the producer for a unit sale of a good or the provision of a service.

Since government-imposed tariffs, like excise taxes, are not retained by producers as revenue, they are explicitly excluded from the PPI. However, pricing decisions producers make in reaction to tariffs would be included. For example, if a domestic producer is manufacturing a product that is subject to import competition and tariffs are placed on those imports, the domestic producer may respond by increasing its prices to maximize revenue. In this case, the price increase from the domestic producer would be included in the PPI. Similarly, if a domestic producer exports products to a foreign country that has placed tariffs on the exported U.S. production of that good to their country, and if the domestic producer lowers its prices either to better compete in that export market or to sell domestically excess inventory that results from those tariffs, those price decreases would also be reflected in the PPI.

The statistical accuracy of producer price indexes depends heavily on the quality of the information voluntarily provided by respondents. BLS emphasizes to cooperating businesses the need for information reflecting realistic transaction prices, including all discounts, premiums, rebates, and allowances, rather than list or book prices. The use of list prices in the PPI program is the exception, rather than the rule.

Neither order prices nor futures prices are collected by the survey because the PPI tries to capture the price for output being shipped in that same month, not some other time. Changes in transportation costs for goods are only reflected in the goods PPIs when the producing company delivers the product itself without hiring a third-party shipper. Transportation provided by third-party shippers are reflected in the various PPI transportation indexes within the services sector.

Most prices collected by PPI refer to one day of the month, specifically, the Tuesday of the week that includes the 13th of the month; this pricing date can range between the 9th and the 15th. However, there are exceptions to this rule for some products and services. For example, several farm products are priced on a day of the week other than Tuesday, and some service industries report prices that reflect average changes for some portion of the month or for the entire month.

Classification

The PPI family of indexes utilizes two major classification systems, industry and commodity. Indexes in both classification systems draw from the same pool of price information provided to BLS by cooperating company reporters.

Industry classification

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). Indexes measuring price change classified by industry form the basis of the program. 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 on other economic phenomena, including productivity, production, employment, wages, and earnings.

The PPI program publishes industry-based price data organized in accordance with the North American Industry Classification System (NAICS). The 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. Industries are the basic building blocks of the NAICS. In addition to indexes for individual industries and their component products, the PPI program publishes indexes for groupings of industries, as well as entire industry sectors.

Within an industry, there may be as many as three kinds of product price. Every industry has primary product indexes that show changes in prices received by establishments in the industry for products made primarily, but not necessarily exclusively, by that 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. For goods producers, most industries also have secondary product indexes that show changes in prices received by establishments in the industry for products made chiefly in some other industry. In both the goods and services sectors, some industries may have miscellaneous receipts indexes to show price changes for non-primary services received by establishments within the industry.

Commodity classification

The commodity classification structure of the PPI organizes products and services by similarity of end use, material composition, or service type regardless of whether the products are classified as primary or secondary in their industry of origin. Examples of commodity groupings include PPI 02, Processed foods and feeds; PPI 10, Metals and metal products; PPI 30, Transportation services; and PPI 51, Healthcare services. These indexes are the building blocks for other commodity-based PPI aggregation systems, including the Final Demand–Intermediate Demand (FD–ID) system. (See detail later in this section.) The PPI commodity index structure is unique to the PPI and does not correspond with other coding structures, such as NAICS or the United Nations Standard International Trade Classification. 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. Within the commodity classification system there are three major PPI aggregation systems: (1) the commodity index structure, (2) the Final Demand–Intermediate Demand (FD–ID) system, and (3) the inputs to industries system.

Commodity aggregation

The commodity aggregation is organized as a hierarchical structure that starts with major commodity groupings (at the 2-digit level of aggregation). Major groupings 01 through 15 encompass commodity-based goods indexes. Major groupings 30 through 61 include services-based commodity indexes, and major grouping 80 encompasses construction-based commodity indexes. Each major commodity grouping includes (in descending order of aggregation) subgroups (at the 3-digit level), product classes (4-digit level), sub-product classes (5- and 6-digit level), item groupings (7-digit level), and individual items (8-, 9-, and 10-digit levels).

FD–ID aggregation

The FD–ID aggregation system is the PPI’s primary aggregation model. The FD–ID system includes goods, services, construction, exports, and government purchases. FD–ID price indexes regroup commodities from the sub-product class (6-digit) level, according to the class of buyer and type of commodity. The two classes of buyers included in the FD–ID system are final demand buyers (personal consumption, capital investment, government, and export) and intermediate-demand buyers (business purchases, excluding capital investment). The intermediate demand portion of this 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.

The main source of data used to determine the class of buyer 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).^⁠1 In many cases, the same commodity is purchased by different types of buyers. As a result, commodities are often included in several FD–ID indexes. In cases when buyer type (consumer, business, or export) is an important price-determining characteristic, indexes are often created on the basis of the specific type of buyer. For a detailed explanation of the FD–ID system, see the Monthly Labor Review article on experimental systems of indexes from the PPI program.

Inputs to industries aggregation

Inputs to industry indexes measure the average change in prices for inputs typically consumed by industries, excluding capital investment, labor, and imports. BLS determines the products to include in an industry input index based on the BEA Use of Commodities by Industries table. BLS calculates weights for each commodity in an industry input index based on this table, as well as revenue data from the U.S. Census Bureau. The gross weight of each commodity in an industry input index equals the share of the total commodity’s value consumed by the industry, multiplied by the Census revenue for that commodity. BLS then converts the gross weight to a net weight by removing the portion of the input commodity’s value that was produced by the industry. BLS uses the BEA Make of Commodities by Industries table to determine the portion of the commodity’s value that is produced by the industry. Visit the Updated Inputs to Industry Producer Price Indexes page for a summary of this aggregation system.

BLS also produces a set of experimental satellite input indexes, which only exclude capital investment and labor. These indexes combine data from the PPI and International Price Index programs to produce input indexes that include imports and are available at the 3-digit NAICS level. For a detailed explanation of the satellite inputs to industries aggregation system, view the BLS satellite series webpage and the Monthly Labor Review article on methodology and uses.

Other commodity indexes

PPI calculates a series of ad hoc, commodity grouping indexes (such as indexes for fabricated metal products, selected textile mill products, prescription pharmaceuticals, over-the-counter pharmaceuticals, and healthcare by patient-type) that rearrange PPI commodity data into different combinations of price series. Some of these indexes maintain historical significance because they include data back to 1947 or earlier (for example, Industrial commodities less fuels, Fabricated metal products, and Machinery and motive products). Other special indexes apply unique, modern PPI methods that provide users with otherwise unavailable index data (for example, Pharmaceutical preparations, over-the-counter versus prescription; Healthcare services by payer type: Medicare, Medicaid, or private insurance).