Tag Archives: PPI

Why This Counts: What is the Producer Price Index and How Does It Impact Me?

The Producer Price Index (PPI) – sounds familiar, but what is it exactly? Didn’t it used to be called the Wholesale Price Index? It is related to the Consumer Price Index, but how? How does the PPI impact me?

Lots of questions! In this short primer we will provide brief answers and links for more information. Note, if you are an economist, this blog is NOT for you. It’s an introduction for everyone else!

Video: Introduction to the Producer Price Index

Before we go any further – what is an index? (You said this was a primer!)

An index is like a ruler. It is a way of measuring the change of just about anything. Producer price indexes measure the average change in prices for goods, services, or construction products sold as they leave the producer.

Here is an example of how an index works:

  • Suppose we created an index to track the price of a gallon of gasoline.
  • When we start tracking, gasoline costs $2.00 a gallon.
  • The starting index value is 100.0.
  • When gasoline rises to $2.50, our index goes to 125.0, which reflects a 25-percent increase in the price of gasoline.
  • If gasoline then drops to $2.25, the index goes to 112.5. The $0.25 decline in price reflects a 10-percent decrease in the price of gasoline from when the price was $2.50.

If you are a gasoline dealer, you might find a gasoline index useful. Instead of driving around every day to write down the prices of each competitor’s gasoline and averaging them together, the index can provide the data for you. (Question #5 in the PPI Frequently Asked Questions explains how to interpret an index.)

PPI is called a “family” of indexes. There are more than 10,000 indexes for individual products we release each month in over 500 industries. That is one big family!

OK, so PPI has lots of data – but what kind of data?

PPI produces three main types of price indexes: industry indexes, commodity indexes, and final demand-intermediate demand (FD-ID) indexes.

An industry refers to groups of companies that are related based on their primary business activities, such as the auto industry. The PPI measures the changes in prices received for the industry’s output sold outside the industry.

  • PPI publishes about 535 industry price indexes and another 500 indexes for groupings of industries.
  • By using the North American Industry Classification System (NAICS) index codes, data users can compare PPI industry-based information with other economic programs, including productivity, production, employment, wages, and earnings.

The commodity classification of the PPI organizes products by type of product, regardless of the industry of production. For example, the commodity index for steel wire uses pricing information from the industries for iron and steel mills and for steel wire drawing.

  • PPI publishes more than 3,700 commodity price indexes for goods and about 800 for services.
  • This classification system is unique to the PPI and does not match any other standard coding structure.

We also have more information on the differences between the industry and commodity classification systems.

The FD-ID classification of the PPI organizes groupings of commodities by the type of buyer. For example, the PPI for final demand measures price change in all goods, services, and construction products sold as personal consumption, capital investment, export, or to government. As a second example, the PPI for services for intermediate demand measures price change for services sold to business as inputs to production.

  • PPI publishes more than 300 FD-ID indexes.
  • This FD-ID classification system is unique to the PPI and does not match any other standard coding structure.

Now let’s go back to the beginning

  • 1902: Wholesale Price Index program begins, which makes it one of the oldest continuous set of federal statistics. The Wholesale Price Index captures the prices producers receive for their output. In contrast, the Consumer Price Index captures the prices consumers pay for their purchases.
  • 1978: BLS renames the program as the Producer Price Index to more accurately reflect that prices are collected from producers, rather than wholesalers.
  • PPI also shifts emphasis from a commodity index framework to a stage of processing index framework. This minimized the multiple counting that can occur when the price for a specific commodity and the inputs to produce that commodity are included in the same total index. For example, think of gasoline and crude petroleum both included in an all-commodities index.
  • 1985: PPI starts expanding its coverage of the economy to include services and nonresidential construction. As of January 2018, about 71 percent of services and 31 percent of construction are covered.
  • 2014: PPI introduces the Final Demand-Intermediate Demand system.
  • The “headline” number for PPI is called the PPI for Final Demand. It measures price changes for goods, services, and construction sold for personal consumption, capital investment, government purchases, and exports. We also produce a series of PPIs for Intermediate Demand, which measure price change for business purchases, excluding capital investment.
  • Let me give you an example: Within the PPI category for loan services, we have separate indexes for consumer loans and business loans. The commodity index for consumer loans is included in the final demand index and the commodity index for business loans is mostly in an intermediate demand index.
  • The Frequently Asked Question on the PPI for Final Demand provides even more information on this new way of measuring the PPI. The blog, Understanding What the PPI Measures, may also be helpful.
  • We also have an article that explains how the PPI for final demand compares with other government prices indexes, such as the CPI.

Why is the PPI important?

To me?

  • Inflation is the higher costs of goods and services. Low inflation may be good for the economy as it increases consumer spending while boosting corporate profits and stocks.
  • A change in producer prices may be a leading indicator of consumers paying more or less. Higher producer prices may mean consumers will pay more when they buy, whereas lower producer prices may mean consumers will pay less to retailers. For example, if the PPI gasoline index increases, you may see an increase soon at the pump!

To others (which may impact me!)?

  • Policymakers, such as the Federal Reserve, Congress, and federal agencies regularly watch the PPI when making fiscal and monetary policies, such as setting interest rates for consumers and businesses.
  • Business people use the PPI in deciding price strategies, as they measure price changes in inputs for their goods and services. For example, a company considering a price increase can use PPI data to compare the growth rate of their own prices with those in their industry.
  • Business people adjust purchase and sales contracts worth trillions of dollars by using the PPI family of indexes. These contracts typically specify dollar amounts to be paid at some point in the future. For example, a long-term contract for bread may be escalated for changes in wheat prices by applying the percent change in the PPI for wheat to the contracted price for bread.

Video: How the Producer Price Index is Used for Contract Adjustment

PPI is a voluntary survey completed by thousands of businesses nationwide every month. BLS carefully constructs survey samples to keep the number of contacts to a minimum, making every business, large and small, critical to the accuracy of the data. We thank you, our faithful respondents! Without you, BLS could not produce gold-standard PPI data.

Finally, check out the most recent monthly PPI release to get all the latest numbers. Head to the PPI Frequently Asked Questions to learn more. Or contact the PPI information folks at (202) 691-7705 or ppi-info@bls.gov.

Want to learn more about BLS price programs? See these blogs:

 

Data Privacy Day is Every Day at BLS

There are many commemorative days, weeks, and months, but Data Privacy Day on January 28 is one that we here at BLS live every day of the year.

If this is the first time you’re hearing about it, Data Privacy Day is an international effort to “create awareness about the importance of:

  • respecting privacy,
  • safeguarding data and
  • enabling trust.”

These three phrases are central to everything we do at BLS—but don’t take my word for it! Instead, let’s hear from some of our staff members about what data privacy means in their day-to-day work lives.

I chatted with staff members from three key areas at the Bureau:

  • Collection — our field economists collect data from respondents.
  • Systems — our computer specialists protect the IT infrastructure where we keep the data.
  • Analysis — our economists analyze the data, prepare products, and explain the data to our customers.

Now, let’s meet the staff.

Richard Regotti

Richard Regotti

My name is Richard Regotti, Field Economist in the BLS Chicago Regional Office, Cleveland Area Office. I have proudly served the public in this position for 12 years. As a Field Economist I am responsible for collecting data and developing positive relationships and securing cooperation from survey respondents for the Producer Price Index and the International Price Indexes.

 

 

 

 

 

 

Jess Mitchell

Jess Mitchell

My name is Jess Mitchell and I have been an Information Security Specialist in the Bureau’s national office since 2013. I started with BLS in 1999. Currently, I am the Computer Security Incident Response Team Lead, so I, along with my team members, investigate, analyze and report on computer security incidents as well as the impact or potential impact of cyber threats and vulnerabilities to BLS systems and data.

 

 

 

 

 

Karen Kosanovich

Karen Kosanovich

My name is Karen Kosanovich, Economist, and I have spent the past 19 years working with unemployment data from the Current Population Survey, and 25 years total at BLS. I develop analyses, such as The Employment Situation, and talk to our customers about the data.

 

 

 

 

 

 

Question 1. One of our core BLS values is the confidentiality of data: All respondent data are completely confidential and used for statistical purposes only. How does this impact you in your daily work?

Richard: On a daily basis I am asking producers and service providers to voluntarily provide very sensitive company information. Even after identifying myself as a representative of our Federal Government, some respondents are not comfortable with agreeing to provide us their confidential information for use in our statistical output. By focusing on the mission of the BLS and the legal protections that are in place to safeguard survey data, I am able to function on the front line as a data collector.

Jess: This core value of data confidentiality helps me to focus on the importance of protecting the confidentiality of BLS data when my team members and I are investigating threats. The importance of BLS data underscores the importance of our daily work to keep BLS data and data respondent information confidential.

Karen: I don’t have access to information about specific people who respond to our survey. All personally identifying information is stripped away before the statistical information is given to an economist like me to analyze. For my colleagues and me, confidentiality means protecting our estimates from being distributed in advance of the official release of the unemployment rate at 8:30 a.m. on the day we publish our data.

Question 2. Does adherence to this core value create any challenges for you in your work? How have you overcome those challenges?

Richard: Adherence to complete confidentiality, supported by the fact that the data are used for statistical purposes only, presents no challenge to me; this core value is a selling point and something I make sure all potential survey participants are aware of prior to providing any data to the BLS.

Jess: Adherence to the core BLS value of data confidentiality does create a challenge when we need to engage our office in an incident or threat investigation; we must be very diligent not to share Confidential Information Protection and Statistical Efficiency Act (CIPSEA) information.

Karen: Our procedures for working with embargoed (prerelease) information are so ingrained in my work routine that I don’t notice any challenges from them. The people I work with all have the same responsibility and a strong commitment to public service, so it is easy for us to keep vigilant.

Question 3. If you could make a statement to the American people about why they should trust BLS with their information, what would that be?

Richard: BLS is not a compliance or regulatory agency in any way. We are only concerned with providing accurate, timely, relevant, and unbiased data that reports on the health and well-being of our economy. Your information contributes to the validity of BLS data.

Jess: The confidentiality of BLS data is always at the root of my office’s work, and I see the same focus on data privacy and confidentiality and diligence toward the safeguarding of CIPSEA data throughout the entire culture of BLS.

Karen: Although I don’t have names and personal details of specific unemployed people who respond to our survey, my colleagues and I are very mindful of the importance of representing the experience of all Americans when we produce our estimates. The data we publish are not just numbers, but tell the story of real people. It can be very stressful to be unemployed, and those who have been looking for work for a very long time face significant challenges in the labor market. We take our jobs, and our mission, very seriously.

And now the rules:

Of course, we don’t work in a vacuum. Like any other organization, we have rules that we live under.

BLS makes a pledge of confidentiality to its respondents that data collected are used for statistical purposes only. The pledge is covered by CIPSEA, which makes it a felony to disclose or release the information for either nonstatistical purposes (for example, regulatory or law-enforcement purposes) or to unauthorized persons. In addition, the Office of Management and Budget has Statistical Policy Directives (3 and 4) that govern BLS news releases to ensure they meet specific accuracy, timeliness, and accountability standards.

On January 28, and every day, we hope you will take steps to protect your own privacy and the privacy of others. Here at BLS we will continue to educate and raise awareness about respecting privacy and safeguarding data. It is core to our mission and central to our staff values. Without the trust these actions produce among the American people, we could not do our work in providing gold-standard data for and about America’s workers.

Thank you for your trust and happy Data Privacy Day!

Measuring Uncertainty in the Producer Price Index

Our mission at the U.S. Bureau of Labor Statistics is to publish information about the labor market and economy. We always seek to improve our methods and provide the most accurate data in a cost-effective manner. All statistics, however, come with some uncertainty. Last year I wrote about how we deal with uncertainty in our measures. Today let’s talk about how we recently have improved our uncertainty measures in the Producer Price Index.

You may think it’s odd that an agency that tells the public what we know also works hard to explain what we don’t know. It may seem like we’re airing our dirty laundry, but that’s not how we see it. At BLS, one of our core values is to be transparent about our methods. Not only don’t we consider the laundry dirty, but we believe that airing it—that is, giving you more information about the strengths and the limitations of our data—is central to our mission. It’s part of our responsibility to give you information you can use to make better decisions.

The Producer Price Index (PPI) program measures the average change over time in the prices U.S. businesses receive for the goods they produce and the services they provide. BLS started publishing the PPI 126 years ago, making it one of our oldest measures. In 2014, the PPI expanded its coverage to provide a broader view of price change for goods, services, and construction. The PPI for final demand measures price change for goods and services sold for personal consumption, capital investment, government, and export. The PPI for intermediate demand tracks price change for goods, services, and construction products sold to businesses.

The PPI for final demand was unchanged in October 2016 and was up 0.8 percent over the last 12 months. But these figures are subject to sampling error. What’s that? It’s the uncertainty that results when we collect data from a sample of prices, rather than gathering prices from each of the millions of transactions that occur every day. For the PPI, we collect about 93,500 prices every month. A different sample of prices might give us different estimates of price change. Fortunately, we have tools to measure this sampling error. Most BLS programs collect data from sample surveys because it is far too expensive and would overburden businesses and workers to send all our surveys to everyone. Instead, we select samples carefully using scientific methods. These sampling methods work well, but they can’t avoid the possibility that the characteristics of a sample may differ from those of the population. We provide estimates of this sampling error by publishing variance estimates with the data. We recently released the first-ever variance estimates for the PPI.

If you aren’t into math, skip the next paragraph.

The measure of variance we use for the PPI is called a standard error. We use the standard error to calculate what statisticians call a confidence interval around the estimate. For example, the 1-month median absolute percent change in the PPI for final demand in 2015 was 0.30 percent. The standard error of that median was 0.11 percent. We can use these two numbers to calculate a confidence interval. In this example, we will use what we call a 95-percent confidence interval. To calculate that confidence interval, we take the estimated median price change of 0.30 percent, plus and minus two times the standard error of 0.11 percent. This gives us a confidence interval between 0.08 percent and 0.52 percent. We call this a 95-percent confidence interval because, if we were to choose 100 different samples of producer prices, the median price change would be between 0.08 percent and 0.52 percent in 95 of those samples.

Chart showing median 1-month changes in Producer Price Indexes in 2015 and the 95-percent confidence intervals around those changes.

OK, if you don’t like math, you can come back now. The chart above shows estimates of 1-month PPI changes (the red dots) each surrounded by its sampling uncertainty (the blue bars). If the blue bar crosses the 0.0 percent line, it means the change is not significantly different from zero.

Variance estimates are just one way BLS evaluates and explains the quality of our data and our methods. We have published information about our methods almost since our beginnings in 1884. Carroll Wright, the first BLS Commissioner, insisted on the “fearless publication of the facts.” We believe the fearless publication of the facts means not just explaining our measures and methods in highly technical terms. We want our measures and the uncertainty around them to be understood by a wide range of people, not just those who have advanced degrees in economics or statistics. We continue to seek clearer ways to explain uncertainty. One way is a new chart we are publishing on the monthly changes in nonfarm employment. In the future, we hope to publish more charts like this and simpler explanations of our methods. If you have ideas on how we can explain our data and methods more clearly, please share them with us below.

BLS data are the gold standard of economic statistics. But even gold bars have marks to indicate their impurities. Similarly, we at BLS don’t hide our impurities. We want you to understand the strengths and limitations of our data so you can use that knowledge to make good decisions.

The Value and Influence of Labor Statistics in the 21st Century

What’s in the “DNA” of BLS—what were we born with? Not so long ago, as I prepared to become BLS Commissioner, I read the First 100 Years of the Bureau of Labor Statistics. The first chapter describes how BLS was created (in 1884) during a time of severe economic upheaval and industrial unrest. Policymakers of the time realized that a key barrier to peace and shared prosperity was the lack of trustworthy information about the economy. What has struck me ever since is how we can trace some of the distinguishing features of today’s modern BLS directly back to those first days, to the vision of one of our founders. This post links that past to the BLS of today.

Carroll D. Wright, first BLS Commissioner

Commissioner Carroll D. Wright

In 1893, sometime after becoming the first Commissioner of Labor, Carroll D. Wright set forth a mission for the agency. He was a pioneer in the search for truth and a better understanding of labor statistics by the public. In his Value and Influence of Labor Statistics (later published in the 54th Bulletin of the Bureau of Labor), he described our mission as collecting “information upon the subject of labor in the United States, its relation to capital, the hours of labor, and the earnings of laboring men and women, and the means of promoting their material, social, intellectual, and moral prosperity.”

Today, our mission is much the same as it was then. Commissioner Wright established a modern statistical agency long before the Internet made it possible for anyone to access our data and read our publications on demand. These days we say that our mission is “to collect, analyze, and disseminate essential economic information to support public and private decision-making.” While the wording has evolved with the times, the core meaning remains the same. Furthermore, in support of our mission for the past 132 years, BLS has practiced what Commissioner Wright termed “the fearless publication of the facts without regard to the influence those facts may have upon any party’s position or any partisan’s views.”

Wright developed much of the vision and practices that he instilled here while working for the Massachusetts Bureau of Statistics of Labor from 1873 to 1878. There he launched several studies to provide the people of Massachusetts with accurate labor market data. One of the largest studies was to find out the true unemployment level in Massachusetts. At the time, many people believed there were 200,000–300,000 people unemployed in the state and 3,000,000 unemployed in the entire country. Alarmists spread word through newspapers, speeches in Congress, and political resolutions until these figures were widely believed as fact, despite no previous attempt to measure unemployment. Wright’s staff canvassed the state twice to discover if the rumored number was accurate. The Bureau of Statistics of Labor of Massachusetts determined the true number of unemployed in the state was 28,508 skilled and unskilled laborers in June 1878; by November there were fewer than 23,000 unemployed, while the national number could not have been more than 460,000 unemployed. Wright explained that “The figures published by the report were used all over the country, and completely reversed the popular belief relative to the vast number of the alleged unemployed in the country.”

Today, you can see a parallel between Wright’s efforts to learn and classify the number of unemployed workers in Massachusetts and how BLS has expanded its offering to include six alternative measures of unused or underused labor. We call these measures U-1 through U-6. BLS not only calculates these alternative measures nationally, but also for each of the 50 states, the District of Columbia, and two large metro areas. This ensures that the American public, researchers, and policymakers have a wide range of data to understand the health of the labor market and make important decisions.

Also similar is our enduring focus on specific populations in the workforce. Under Wright’s leadership, state Bureaus of Labor investigated the use of child labor and uncovered the “evils it entailed upon the community.” The Bureaus published the number of young children (those under 10 years old) who worked in factories and workshops. Because of these studies, the numbers declined significantly. Time and again, Wright sought out the facts and ensured the American people had the information they needed to make decisions. Wright said, “It is only through rigid, impartial, and fearless investigations that any community can know itself in many directions.”

Today, we continue to seek new and better measures about particular groups in our economy and society. For example, in recent years BLS expanded the scope of the Current Population Survey to include six new questions to identify people with disabilities. These data provide insight into the labor market challenges of people with disabilities. The data aid individuals, nonprofit organizations, employers, and policymakers in making decisions affecting the lives of Americans with disabilities. Our monthly Employment Situation report now includes information about the employment status and labor force participation of the more than 30 million Americans age 16 and older living with a disability.

Our “DNA,” that is, our mission, our vision, and our understanding of the value of the statistics we produce, is as important today as it was in 1884. We continue our determined work to impartially collect, analyze, and publish essential economic information to support private and public decision-making. Today BLS provides a wide variety of information that benefits all Americans. I am certain that Commissioner Wright would be pleased that our reports, charts, and data are far more accessible than he ever could have imagined. Whether you’re exploring a new occupation, starting a business, looking for the change in consumer and producer prices, identifying average wages by occupation, or learning how Americans spend their time, there’s a stat for that. For all these situations and many more, BLS helps Americans make smart decisions in their lives. The cost of providing this valuable information may come out to less than $2 per person each year, but its positive impact remains priceless.

Why This Counts: Understanding what the Producer Price Index Measures

Today the Bureau of Labor Statistics released the October 2015 “Producer Price Index for Final Demand and Intermediate Demand.” Let me explain what that technical-sounding title is all about. A decades-long process to improve and expand the Producer Price Index (PPI) culminated in the first monthly release of Final Demand-Intermediate Demand data in early 2014. This expansion may have made things a little more complex for the casual user. While we are exploring ways to simplify our words and concepts, I’m taking a stab at simplification in today’s blog. A rose by another name might be easier to understand.

We have 125 years’ worth of PPI data—one of the oldest measures produced by BLS. Originally called the Wholesale Price Index, the PPI measures the change in the prices that “producers” (businesses) receive for the sale of goods and services. We divide these producer prices into those paid for “final demand” and those paid for “intermediate demand.” Today I’m going to focus on final demand; in a future post I’ll examine intermediate demand.

The PPI for Final Demand measures the change in the prices that businesses receive for the sale of goods and services that are in their final form—ready to use. Sales may be to individuals (for personal consumption), to other businesses (for capital investment), to governments, or for export. The index is further divided by the type of product sold. I’ll provide a few examples—a manufacturer, a service provider, and a retailer.

In October 2015, the PPI for passenger cars rose 2.6 percent for the month and 1.4 percent from a year earlier. To measure this change in the price that auto manufacturers receive for the sale of passenger cars, we want to compare apples to apples. For example, any extra cost associated with adding mandated back-up cameras would be removed as part of a “quality adjustment” made to ensure price comparability. Simply put, auto manufacturers received 1.4 percent more for the sale of a comparable car than they did a year earlier.

As services have become a bigger and bigger part of the U.S. economy, the PPI has expanded its coverage to include many services, such as healthcare. The price that healthcare providers receive for their services, such as office exams, lab tests, and hospitalizations, include co-pays and both public and private insurance reimbursements. The PPI for outpatient care rose 0.2 percent in October 2015 but fell 0.3 percent over the year. Outpatient healthcare providers received 0.3 percent less for their services than they did a year earlier.

For wholesalers and retailers, the PPI measures the difference between the purchase price and the selling price of goods; this difference is known as the margin. Think of your local supermarket. They purchase goods for sale to customers—meat, dairy, fruits and vegetables, quinoa, toilet paper, and other items—all things you might put in your grocery basket. The difference between the price the grocer pays for these goods and the price they receive from the consumer is their margin. The PPI measures the change in that margin. In October 2015, the PPI final demand trade services fell 0.3 percent over the month and 0.7 percent from a year earlier. Wholesalers’ and retailers’ margins were 0.7 percent less than a year earlier.

The following chart shows PPI final demand price changes for selected categories over the past several years.

PPI blog

I hope I’ve provided a little insight into how to read and understand the monthly PPI release. In the future I’ll try to delve further into the PPI and its measure of intermediate demand. Stay tuned.