Finding, Understanding, and Using BLS Price Indexes. Get to know our audience. Get to know our audience

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1 Finding, Understanding, and Using BLS Price Indexes Steve Reed Economist, Consumer Price Index, BLS Joseph Kowal Economist, Producer Price Index, BLS NIGP Webinar January 21, PM ET Get to know our audience How many years of procurement experience do you have? 2 Get to know our audience How familiar are you with using the Consumer Price and Producer Price Indexes?

2 Agenda Topic 1 Consumer Price Index (CPI) Overview of CPI Obtaining CPI data from the BLS Website Escalation and Consumer Prices Question and Answer Period Topic 2 - Producer Price Index (PPI) Overview of PPI Obtaining PPI data from the BLS Website Escalation and Producer Prices Question and Answer Period 4 Consumer Price Index Overview of CPI Definition CPI Methodology and structure CPI Publication 5 CPI Overview Definition of the CPI In the U.S., the goal of the CPI is to approximate a cost of living index Cost of living is a theoretical concept. The CPI seeks to measure the change in the cost of living by measuring the change in prices of a market basket of goods and services

3 CPI Overview Market basket and geographic sample In the CPI, the consumer market basket is a categorization of goods and services with corresponding weights. In the U.S. there are 211 categories of items (goods and services) CPI data is collected in 87 metropolitan statistical areas in all regions of the country CPI Overview Structure of the CPI With a geographic sample and market basket in place, we now have a matrix of component cells from which to build a CPI Items x Locations = Cells 211 items x 38 locations = 8018 cells Basic indexes calculated for each cell CPI Overview Atlanta Boston South BC Milk Index Index Index Cheese Index Index Index Ice Cream Index Index Index

4 CPI Overview Data collection CPI price data are collected throughout the entire month. The month is divided into three pricing periods, with field representatives required to collect data during each period. The price sought in the CPI is the retail, transaction price paid by the consumer, including sales and excise taxes. Each month a field staff of about 350 part-time economic assistants and 100 full-time economists collect prices for over 94,000 individual items based on personal visits to more than 28,000 outlets in 87 cities. Overview of creating the CPI Survey of Consumers Geographic Sample Market Basket Take prices Basic Indexes Final indexes Calculate price relatives Aggregation CPI Overview Structure of the CPI CPI structure is from the point of view of consumer Structure is unique to CPI and does not correspond to NAICS or other classification systems

5 CPI Overview Seasonal adjustment As with many economic statistics, many prices may follow a seasonal pattern. This can distort month-to-month inflation Seasonal adjustment involves the creation of factors to offset seasonal variation Seasonal adjustment requires several years worth of data Unlike unadjusted data, seasonally adjusted data is regularly revised CPI Overview CPI classification system CPI classification system is from the point of view of consumer System is unique to CPI and does not correspond to NAICS or other classification systems CPI Overview Publication of the CPI The most noted CPI is the All Items U.S. City average The CPI is broken down by type of item and by geographic location Because of small sample size, many geographic-item combinations are not published Broader geographic indexes have more indexes published. Also, some individual city CPIs are bimonthly or semi-annual rather than monthly.

6 CPI Overview Major Groups in the CPI Food and Beverages Housing Apparel Transportation Medical Care Recreation Education and Communication Other Goods and Services CPI Overview CPI Publication Special aggregates of economic interest are also published such as: All items less food and energy (core) All items less shelter In addition to the index values, monthly and yearly changes are also published. Index values are now published to three decimal places; percent changes are always published to one decimal place. Obtaining CPI Data CPI homepage Almost all CPI data is available online News releases contain summary of recent data Historical tables available in databases section Data available for all published categories and geographic areas 18

7 Obtaining CPI Data Using the website The website can generate percent changes automatically, as well as index values Some applications may not work on all computers Pop-up blockers can interfere with some applications CPI economists are happy to help you find what you need on the site 19 Obtaining CPI Data Other CPI material available online Weights of different categories CPI technical information and methodology Guide to using the CPI for escalation Information on recent developments and issues 20 Escalation and the CPI Key differences between price indexes Coverage and purpose Timing and method of price collection Structure Publication Revision policy

8 Escalation and the CPI Basics of escalation Choose the index to be used as an escalator and exactly specify it in the contract or agreement Specify the exact time frame and frequency of escalation Consider a contingency plan if the index is changed or dropped in the future Be aware of past behavior of the index and the mathematics of escalation Escalation and the CPI CPI or PPI? CPI best if adjustment should reflect cost of living increase, general consumer inflation, or increase in price of particular type or class of consumer good or service. PPI best if adjustment should reflect increase in price of particular type or class of producer good or combination of producer goods. Escalation and the CPI Which CPI category? All Items CPI appropriate when cost of living or general consumer inflation desired. Sometimes may be appropriate to use a specific CPI category that matches what is being escalated. BLS advises broader categories be used. Narrower categories will be more volatile and should only be used if they are a good match. Narrower categories may be changed or discontinued.

9 Escalation and the CPI Which CPI geographic area? Nationwide CPI is broadest and most commonly used Regional CPIs and CPIs for specific large metropolitan areas also available CPI not available by state or county Many individual metro area CPIs are bi-monthly or semi-annual Escalation and the CPI What time period? The CPI and PPI are monthly and are published near the middle of the following month Some CPI for individual cities are bi-monthly or semiannual December-December and Annual Average-Annual Average percent changes are both often used in escalation Consistency is important Escalation and the CPI Other issues Caps or floors may be used to protect one or both parties Parties may choose to add or subtract a fixed amount to an index change

10 Escalation and the CPI Common escalation mistakes Failing to fully specify the index to be used Failing to fully specify the time period to be used Interpreting a raw difference between indexes as a percentage Adding yearly increases to obtain a multi-year increase Using an inappropriate index Question and Answer Period To ask a question over the phone, press *1 on your touchtone phone. This will place your call into an electronic queue. To remove yourself from the queue press #. To ask a question over the web, type your question in the area at the upper part of the Q&A window and click on Ask. Thanks for your questions. 29 Producer Price Index Overview of PPI Definition Methods Used to Create PPIs PPI Publication Structures Calculating Percentage Changes from Index Data 30

11 PPI Overview Definition PPIs are indexes that track the average changes in net selling prices that producers and service providers receive for the products and services they make and sell. PPIs are calculated on a monthly basis. PPIs do not directly track input costs. PPIs do not directly track prices producers pay. PPIs do not track so-called wholesale prices. 31 PPI Overview Methods Used to Create PPIs PPIs are created using a survey that samples producers by industry. Industries are defined according to the North American Industry Classification System (NAICS). Industry samples are updated, on average, every 7 to 8 years. Industries characterized by changing products or large scale producer entry and exit are updated more often. 32 PPI Overview Methods Used to Create PPIs Producers are selected using a probabilitybased sampling methodology. Producers in individual industries have chances for selection into the survey based on their relative importance within their industry. Once at the establishment, individual prices for products or services are selected based on the relative importance of specific product or service lines at the selected place of business. 33

12 PPI Overview PPI Publication Structures PPIs are organized into three main aggregation models. Indexes organized by industry of origin Indexes organized by commodity grouping Indexes organized by Stage of Processing (SOP) 34 PPI Overview PPI Publication Structures Industry Industry level data are based on the PPI sample of products from producers. Industry level data are grouped into sector aggregates: Groups of similar industries (food manufacturers, chemicals manufacturers) Entire sectors also are grouped (total manufacturing industries, total transportation industries) 35 PPI Overview PPI Publication Structures Industry Recent milestones for industry based PPIs Expansion to include more coverage of the services sector of the U.S. economy (trade industries, transportation services, health care). Expansion into the nonresidential construction sector (office buildings, warehouses, schools). Increasing interest in PPI s material and supply inputs to construction industries model. 36

13 PPI Overview PPI Publication Structures Commodity Prices collected from producers are re-organized according to similarity of use and material composition. Prices from multiple industries can be combined to create a single commodity index, providing a better overall picture of price movements for the product. For example, steel mill products, paper products, and chemicals each are produced by more than one industry. 37 PPI Overview PPI Publication Structures Commodity At the highest levels of aggregation, PPI commodity indexes are subject to a problem called multiple counting. Multiple counting is a condition that occurs when inputs to products as well as the finished products are included in a single index. This situation often results in index movements that exaggerate price movements in the economy. 38 PPI Overview PPI Publication Structures Commodity Prominent examples of PPIs subject to the multiple counting problem: All Commodities Industrial Commodities Fuels and Related Products and Power (PPI 05) Metals and Metal Products (PPI 10) This problem is the main reason PPI moved away from emphasizing the All Commodities structure and began emphasizing the SOP structure in

14 PPI Overview PPI Publication Structures Commodity Recent milestones for commodity PPIs Introduction of service-based indexes organized according to service type. These indexes also are based on price data originally collected by industry. These aggregations often differ from their industry based counterparts. These indexes are the basis for further enhancements to PPI. 40 PPI Overview PPI Publication Structures SOP Commodity indexes for goods organized with regard to their level of fabrication and buyer type. Crude goods (extracted or harvested goods, or their equivalents) Intermediate goods (processed and semiprocessed goods for business demand) Finished goods (processed goods for distribution to households, capital equipment) 41 PPI Overview PPI Publication Structures SOP Many of the indexes for goods that might interest this audience fall under capital equipment or intermediate goods. Examples within capital equipment: motor vehicles, transformers, construction machinery. Examples under intermediate goods: materials and components for manufacturing, materials and components for construction, supplies, motor vehicle parts, aircraft engines and engine parts, diesel fuel, jet fuel. 42

15 PPI Overview Calculating a Percentage Change Indexes reflect shifting price levels. Price changes are reflected as percentage differences between index levels. % change Formula: ((Current Index - Previous Index) / Previous Index) * 100 = % change Example: current index = and previous index = reflects a 10% increase in prices. 43 Obtaining PPI Data from the BLS Website PPI homepage Popular options for obtaining PPI data: Top Picks Series Report One Screen Data Search Multiple Screen Data Search PPI Monthly Releases and Reports PPI News Releases PPI Detailed Reports 44 Obtaining PPI Data from the BLS Website Series Report Users download data by entering series identifiers. Users who know what BLS data they require might be best served by employing this tool. Users can get data from more than one database (including different BLS programs) at one time. Instructions for formatting PPI series IDs can be obtained from the PPI technical note at 45

16 Obtaining PPI Data from the BLS Website One Screen Data Search Industry data are available at: Commodity data are available at: Users narrow their search by drilling down through category designations. Best tool for users who understand PPI aggregation structures but do not know the series IDs of the data. Tutorials for this option are available at: 46 Obtaining PPI Data from the BLS Website Multiple Screen Data Search Provides the same results as the one screen search, only it is more cumbersome and less intuitive. Some users employ this method because it does not require a Java enabled browser or pop-up permissions. These two issues sometimes cause problems for data users selecting the one screen search method. Tutorials and access for the multiple screens option also are available at: 47 Obtaining PPI Data from the BLS Website PPI Monthly Releases and Reports PPI News Releases PPI Detailed Reports Be careful using these resources, since all current month index values and percentage changes are based on data that will be recalculated 4 months after original publication. 48

17 Escalation and Producer Prices Full text of the PPI escalation guide: Guidelines for Developing Escalation Clauses Pitfalls to Avoid in Using PPIs for Contract Escalation 49 Escalation and Producer Prices Guidelines for Developing Escalation Clauses Establish the base selling price for the product or service subject to escalation. Note the month and year for the base price. This date serves as the base period for the escalation, assuming the escalation moves prices forward from that point in time. Select an appropriate index or set of indexes to use for the escalation. If more than one index is to be used for example, separate component escalators for materials, labor, and general overhead assign relative weights and describe the calculation. 50 Escalation and Producer Prices Guidelines for Developing Escalation Clauses Clearly identify the PPIs that are to be used. Cite the index title. Understand, however, that the title may get updated over time while still essentially representing the same basket of goods. Cite the series identifier for the index. These rarely change, but an index code in PPI can be recoded and still represent the same basket of goods. If questions arise about titles or codes, the PPI can easily assist in clarifying what happened to cited codes and titles. 51

18 Escalation and Producer Prices Guidelines for Developing Escalation Clauses State whether seasonally adjusted or unadjusted indexes will be used. Typically, users cite the unadjusted PPI data, since these data directly reflect price changes in dollar transactions. State the frequency of the price adjustment. Define the mechanics of the price adjustment. Provide for missing or discontinued data. This is particularly relevant if detailed PPIs are employed for the escalation. 52 Escalation and Producer Prices Guidelines for Developing Escalation Clauses Specify that calculations will be based on the latest version of the PPI data that are available. Always use the final version of an index (if available). All PPIs are recalculated 4 months after original publication. Parties should agree to an exact date for the escalation (for example, after the release of PPI data for December 2009, or January 31, 2010). This clarifies which period constitutes the current period for the escalation. For PPI, avoid locking indexes to a particular index base. Unlike CPI, PPI does not publish indexes on more than one index base. 53 Escalation and Producer Prices Pitfalls to Avoid Avoid vague citations. Consider avoiding high level commodity indexes subject to the problems caused by the multiple counting of price changes: All Commodities, Industrial Commodities, PPI Fuels (PPI 05), PPI Metals and Metal Products (PPI 10). Avoid ambiguous references to dates (for example, the index for December 31, 2009). This reference could be interpreted to mean either the November or December index. All PPIs are monthly indexes or annual averages. Avoid ambiguous terms, such as actual indexes or the PPI. No single index is titled The PPI. 54

19 Question and Answer Period To ask a question over the phone, press *1 on your touchtone phone. This will place your call into an electronic queue. To remove yourself from the queue press #. To ask a question over the web, type your question in the area at the upper part of the Q&A window and click on Ask. Thanks for your questions. 55 Contact Information Steve Reed Economist, CPI, Prices and Living Conditions reed.steve@bls.gov Joseph Kowal Economist, PPI, Prices and Living Conditions kowal.joseph@bls.gov