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Handbook of Methods Producer Price Indexes Design

Producer Price Indexes: Design

Each industry in the Producer Price Index (PPI) has an individually designed sample, which is the basic starting point for determining which companies’ pricing information will be included in the PPI. The first step in selecting a sample is to construct a frame that includes all the establishments classified within that North American Industry Classification System (NAICS) industry. The primary source for compiling this list of the universe of establishments is the Quarterly Census of Employment and Wages because most employers are legally required to participate in that program. Supplementary information from other publicly available datasets may be used to refine the industry’s frame of establishments.

The next step in constructing an industry sample consists of clustering company establishments into price-forming units. Each member of a price-forming unit must belong to the same industry; establishments in a profit center that belong to another industry are excluded in this step. An establishment is defined as a production entity in a single location. Two establishments may occupy the same or adjacent space if they are separable by physical identification, recordkeeping, or both. Establishments are the units for which production and employment data usually are collected; however, in many cases single establishments are not the appropriate unit for the collection of producer price data. For example, several establishments within a single firm may be operated as a cluster and constitute a profit-maximizing center. In such cases, the business maximizes profits for the cluster, rather than for any one establishment.

Once a list of price-forming units for an industry has been compiled, the list may be stratified by variables appropriate for that industry. The criterion for identifying sampling strata is whether price trends may be different for different values of a variable. Some industries may be characterized by geographically independent markets, which may become a stratum. Within each stratum, units usually are ordered by size to ensure a proportionate distribution of the sample.

The next step is to assign the number of units to be selected in each stratum. This number may be in direct proportion to the value of shipments by units in each stratum, but if there is evidence that some strata have more heterogeneity in price change, those strata will be assigned a greater proportion of the total sample than their shipment values would require. Finally, a sample of price-forming units is selected systematically, with a probability of selection proportional to its size. Ideally, the proper measure of size would be the total revenue of the unit. In practice, however, employment is often used as a proxy, because employment information is more readily available.

Once an establishment or cluster of establishments is selected for pricing, a U.S. Bureau of Labor Statistics (BLS) field economist approaches the unit to solicit cooperation. The management of the unit is assured that its assistance is completely voluntary, that any information it agrees to provide to BLS will be used for statistical purposes only, and that BLS will hold that information in confidence to the full extent permitted by law following the Confidential Information Protection and Statistical Efficiency Act (CIPSEA).

If the establishment agrees to participate in the PPI program, the BLS field economist proceeds to select those transactions that are to be priced through time from among all of the unit’s revenue-producing transactions. A probability sampling technique called disaggregation is used to select the transactions. The disaggregation procedure assigns to each category of products shipped and to each category of other types of receipts a probability of selection proportional to the value of the category within the reporting unit. The categories selected are broken into additional detail in subsequent stages, until unique products are identified.

Even after a physically unique product has been selected, it is usually necessary to disaggregate further. If the same product is sold at more than one price, then the conditions which determine the price—such as the size of the order, the type of customer, and the type of contract, if any—also must be selected on the basis of probability. This method for identifying the terms of transaction ensures that the same type of transaction is priced over time and eliminates any bias in the selection of the terms of sale. (See a sample PPI program initiation questionnaire.)

The sample of each industry’s producers and output must be updated periodically to account for changing market conditions. This procedure, called resampling, takes place relatively often for industries marked by dynamic changes in production methods, by technological transformation, or by substantial producer entry or exit. More stable industries undergo resampling less frequently. In practice, many of the reporting establishments and products included in a sample may be the same both before and after resampling.