At BLS, we strive to find the best methods for measuring the U.S. economy and to explain those methods clearly to our customers. We’re always eager to clarify issues that aren’t easy to understand. This week’s Producer Price Index (PPI) report for October 2014 received more attention than usual. The 0.2-percent increase in our headline number, the index for Final Demand, surprised many people who had seen recent news reports about large declines in energy prices and their impact on overall inflation trends. Although the index for Final Demand Energy fell 3.0 percent, the October advance in overall Final Demand prices resulted mainly from a 1.5-percent rise in the index for Final Demand Trade Services.
The trade services index is part of a new, more complete method of measuring producer prices that we introduced in January 2014. This new system includes prices for goods, services, and construction. We have some materials to help you understand this more complete picture of the domestic economy. We welcome your thoughts and questions, and I invite you to comment below.
The trade services indexes measure the changes in margins that wholesalers and retailers receive, rather than price changes for physical goods themselves. Businesses in the trade sector buy goods to resell. These businesses usually don’t change the goods before reselling them, so the PPI treats trade businesses as suppliers of services rather than goods. The PPI measures the output of a trade business as the difference between its selling price and purchase price of an item. (This measure reflects any discounts in the selling or purchase price.) This difference is the margin. Margin prices reflect the value that businesses add for marketing, storing, and making goods easily available to buy. You can read more about the methods for measuring trade services in the PPI.
The goal of the PPI is to measure price change for all domestic output. Trade is a significant part of the U.S. economy, so the PPI now includes trade services in the overall Final Demand index. BLS also publishes special indexes that exclude components such as food, energy, exports, and even trade services. For example, in October 2014, the index for Final Demand less Trade Services declined 0.2 percent, while the index for Final Demand less Foods, Energy, and Trade edged up 0.1 percent. Our goal is to allow you to view producer price changes from several different vantage points, while emphasizing the more comprehensive picture.