CPI or PPI? BLS Data for Contract Price Adjustment

Transcription

1 CPI or PPI? BLS Data for Contract Price Adjustment Lana Conforti Economist Producer Price Index (PPI) Program U.S. Bureau of Labor Statistics August 23, 2016, 10:15AM 11:15AM

2 BLS Data & Your To-Do List Contract Price Adjustment Administrative interpreting contracts & maintaining customers Sourcing market research, competitive negotiations, mitigating risk, drafting contracts Supply Management Strategic Planning forecasting, analyzing economic trends 2 U.S. BUREAU OF LABOR STATISTICS bls.gov 2

3 BUREAU OF LABOR STATISTICS (BLS) DATA IN THE HEADLINES

4 BLS Wage and Price Index Data 4 U.S. BUREAU OF LABOR STATISTICS bls.gov

5 Quarterly BLS Data on Hospital Pay & Prices (rebased to Jan. 2013) ECI for Hospitals (CIU I) PPI for Hospitals (PCU ) ECI is up 6.2% Jan Apr PPI is up 3.1% Jan Apr Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 5 U.S. BUREAU OF LABOR STATISTICS bls.gov

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7 Employment Cost Index (ECI) Measures changes in employers costs of wages and benefits for their employees Available quarterly by 15 industry sectors 9 occupation groups (e.g. manager, production worker) Private vs. Government Region Union vs. Nonunion Limitations Groupings are broad Contract Uses Accounting for labor input costs Labor intensive areas (i.e. service industries) of PPI/CPI non-coverage NCSINFO@BLS.GOV U.S. BUREAU OF LABOR STATISTICS bls.gov

8 Examples of ECI Data Compensation for Private industry workers in Management, business, and financial occupations (CIU I) Compensation for State and local government workers in Elementary and secondary schools (CIU I) Compensation for Private industry workers in Retail trade (CIU I) 8 U.S. BUREAU OF LABOR STATISTICS bls.gov

9 Consumer Price Index (CPI) Measures changes in prices average households (a.k.a. consumers) pay for everyday purchases Available monthly by 211 items 8 subgroupings Various special groupings (e.g. All items less food) Available quarterly by Region or Metropolitan Area Limitations Only goods and services bought by your average household Groupings are relatively broad Contract Uses General measure of inflation (i.e. CPI-U, All items) Adjusting wage, rent, and other payments to account for changes in the cost of living Areas of noncoverage in the PPI (e.g. public transportation) Items subject to long-run regional influences on price changes CPI_INFO@BLS.GOV U.S. BUREAU OF LABOR STATISTICS bls.gov

10 Examples of CPI Data Breakfast cereal (CUUR0000SEFA02) Food away from home (CUUR0000SEFV) DC-Baltimore Metro Area Recreation (CUURA311SAR) U.S. BUREAU OF LABOR STATISTICS bls.gov

11 Import Price Index (IMP) Measures changes in prices for goods purchased by U.S. entities from non-u.s. entities Available monthly by End use of the import (BEA classification) Industry which produces the import (NAICS classification) Harmonized system classification (Customs) Locality of origin (i.e. China, Canada, etc.) Limitations Only service data is for air freight Groupings for some goods are relatively broad Contract Uses Areas of non/light coverage by PPI for imports (e.g. computers) Analysis of competitiveness of imports to PPI for same products U.S. BUREAU OF LABOR STATISTICS bls.gov

12 Examples of IMP Data Automobile and light duty motor vehicle manufacturing (EIUIZ33611) Selected Building materials (EIUIR13) Seafood products from the Pacific Rim (EIUCOPRIMZ3117) 12 U.S. BUREAU OF LABOR STATISTICS bls.gov

13 Producer Price Index (PPI) Measures changes in selling prices domestic producers receive for their output Available monthly by Nearly all goods and 75% of services (1500+ detailed indexes) Industry of origin 500+ NAICS classification Similarity or end use ( Commodity classification) Level of processing and end use (Final Demand-Intermediate Demand) Industry of consumption (Inputs to Industry) Various special groupings Limitations Some service industries not covered Contract Uses General measure of inflation from the producers perspective (e.g. PPI for final demand, PPI for materials for food mfg) Goods and services bought by businesses as inputs to production, including materials, services, and equipment Consumer goods and services from the seller s perspective PPI-INFO@BLS.GOV U.S. BUREAU OF LABOR STATISTICS bls.gov

14 Examples of PPI Data Janitorial services (WPU491) Hard surface soaps and detergents (WPU ) Intermediate demand: Materials for food mfg (WPUID61111) Canned vegetables (WPU ) Software maintenance, technical support, and other services (PCU ) Inputs to highways and streets construction (WPUIP231231) 14 U.S. BUREAU OF LABOR STATISTICS bls.gov

15 CPI vs. PPI? vs. IMP vs. ECI Under which index you would look for 15 U.S. BUREAU OF LABOR STATISTICS bls.gov

16 BLS Index Data Coverage Summary PPI Nearly all goods and most services ECI Labor costs IMP Imported goods CPI Household goods and services 16 U.S. BUREAU OF LABOR STATISTICS bls.gov

17 BLS Index Data Uses Summary ECI Accounting for labor costs For service industries with CPI/PPI noncoverage CPI To track general inflation use the CPI-U, all items Accounting for prices of goods and services households buy Areas of PPI noncoverage When the region influences long-run prices IMP PPI For goods not or lightly covered by PPI Analysis of U.S. vs. foreign price competitiveness Accounting for prices of nearly all goods and most services bought by households, businesses, and the government For general inflation, look to the FD-ID PPIs Supply chain analysis 17 U.S. BUREAU OF LABOR STATISTICS bls.gov

18 Contract Price Adjustment Steps using BLS index data BLS Guides Available at 18 U.S. BUREAU OF LABOR STATISTICS bls.gov

19 Contracting Scenario You are a public procurement office who regularly buys individually bagged snack foods from a supplier to be sold to students in public schools. 19 U.S. BUREAU OF LABOR STATISTICS bls.gov

20 Start by Listing the Input Costs of the Supplier Choose an index or indexes representing the costs for providing a particular product or service, rather than an index for the product itself. e.g. If contracting for purchases of potato chips, it would be advisable to tie the escalation clause to a PPI for potatoes rather than the finished snacks. Research Inputs: Ask the supplier Look up industry input data from Census.gov BEA input-output table: Use of commodities by industry valued at producers prices Browse trade publications Web search 20 U.S. BUREAU OF LABOR STATISTICS bls.gov

21 Food inputs 20% Packaging 15% Energy 15% Labor 50% Contracting Scenario: Supplier s Inputs In which index would you start to look for each of these? 21 U.S. BUREAU OF LABOR STATISTICS bls.gov

22 22 U.S. BUREAU OF LABOR STATISTICS bls.gov Get Data Step 1: Go to DATA.BLS.GOV

23 Get Data Step 2: Scroll --- down to select a database 23 U.S. BUREAU OF LABOR STATISTICS bls.gov

24 Get Data Step 3: Follow Data Tool Instructions All programs: Follow all steps on one screen (Requires JAVA software and pop-ups) Each one-screen step on individual screens without the need for pop-ups (TIP: Hold Ctrl on your keyboard for multiple selections) 24 U.S. BUREAU OF LABOR STATISTICS bls.gov

25 PPI s Data Seeker s Guide U.S. BUREAU OF LABOR STATISTICS bls.gov

26 PITFALLS TO AVOID WHEN CHOOSING DATA Avoid using All Commodities, Industrial Commodities, or other highly aggregated PPIs Use FD-ID PPIs instead for tracking general inflation Avoid using seasonally adjusted indexes Do not use trade (retailer or wholesaler) indexes in place of product PPIs e.g. A PPI for electronics stores is not a substitute for a computers PPI 26 U.S. BUREAU OF LABOR STATISTICS bls.gov

27 Food inputs 20% Contracting Scenario: Supplier s Inputs WPUID61111 Intermediate Demand - Materials for food manufacturing Packaging 15% WPU Coated and laminated single and multi-web film Energy 15% WPU0543 Industrial electric power Labor 50% 27 U.S. BUREAU OF LABOR STATISTICS bls.gov 27

28 Get Data Step 2: Scroll --- down to select a database 28 U.S. BUREAU OF LABOR STATISTICS bls.gov

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31 Analyze Your Index Options Food inputs 20% WPUID61111 Intermediate Demand - Materials for food manufacturing Packaging 15% See all potential data side-by-side with Series Report DATA.BLS.GOV WPU Coated and laminated single and multi-web film Energy 15% WPU0543 Industrial electric power Labor 50% (ECI data) CIU I Total compensation for Private industry workers in Manufacturing 31 U.S. BUREAU OF LABOR STATISTICS bls.gov

32 Risk Assessment Using Historical Data 32 U.S. BUREAU OF LABOR STATISTICS bls.gov

33 Risk Assessment Using Historical Data 33 U.S. BUREAU OF LABOR STATISTICS bls.gov

34 Write a Price Adjustment Clause using Index Data Base terms Index specifications Calculation method Exceptions and caveats 34 U.S. BUREAU OF LABOR STATISTICS bls.gov

35 Write the Base Terms for the Contract Price Adjustment The base selling price for a pallet of 1,000 1oz bags of snacks is set at $ as of December 2013, to remain in effect for 1 year. December 2013 is hereafter called the reference base period. The base selling price shall be adjusted on March 1st of each subsequent year, based upon the percent changes (whether up or down) in the indexes described below, between the reference base period and December of the most recent year. All calculations for the index shall be based upon the latest version of data published as of February 20th each year. 35 U.S. BUREAU OF LABOR STATISTICS bls.gov

36 How to Specify Index(es) and Source A specific index should be cited by referring to the Producer Price Index for followed by the exact title and code. Industry Data Example Industry: Scheduled passenger air transportation Product: Domestic Series ID: PCU Commodity Data Example Group: Fuels Item: Gasoline Series ID: WPU0571 For the most up-to-date data, including revisions, access the databases at For preliminary data, access the PPI Detailed Report at 36 U.S. BUREAU OF LABOR STATISTICS bls.gov

37 Add Index Specifications to the Contract in the indexes described below, between the reference base period and December of the most recent year. All calculations for the index shall be based upon the latest version of data published as of February 20th each year. From the U.S. Bureau of Labor Statistics official database (data.bls.gov): LABOR: Employment Cost Index (ECI), Total Compensation for Private industry workers in Manufacturing, All workers, U.S. (CIU I) FOOD: Producer Price Index (PPI), Intermediate Demand Materials for food manufacturing (WPUID61111) PACKAGING: PPI for Coated and laminated single and multi-web film (WPU ) ENERGY: PPI for Industrial electric power (WPU0543) 37 U.S. BUREAU OF LABOR STATISTICS bls.gov

38 Calculating a price adjustment using one index Escalation agreements using the PPI usually involve changing the contract s base price by the percent change in the level of the PPI between the reference base period and the time period of the price adjustment. Here is the basic formula using a single index: New price = Old price x (current period index/base period index) = $ x (203.1/199.7) = $ x = $ (this is also a 1.7% increase, although we didn t explicitly calculate it) 38 U.S. BUREAU OF LABOR STATISTICS bls.gov

39 Calculating price adjustment by creating a composite index 39 U.S. BUREAU OF LABOR STATISTICS bls.gov

40 Include an Example of Calculation Mechanics in the Contract ENERGY: PPI for Industrial electric power (WPU0543) 40 U.S. BUREAU OF LABOR STATISTICS bls.gov

41 AVOID NOT ACCOUNTING FOR REVISIONS OR DATA ERRORS Current Revision Policies PPI CPI IPP ECI All data subject to revision 4 mo. after original publication Not revised Data subject to revision each of 3 mo. after original publication Solutions Not revised Set your base terms to wait for revised data before escalating Specify using the latest non-preliminary index data Recalculate upon the release of revision Only recalculate if the percentage change is a certain amount different Do nothing (If you always escalate from the base, you ll make up for it next adjustment) 41 U.S. BUREAU OF LABOR STATISTICS bls.gov

42 AVOID NOT ACCOUNTING FOR MISSING/DISCONTINUED DATA An index may go out of publication for if we can t collect enough data to calculate a reliable estimate PPI re-samples to update the mix of products and services (currently 3x/year) indexes may be added, deleted, or recoded Solutions Allow for the use of the next higher aggregate index (if it makes sense) Allow a proxy index Replace the index with its re-code Compare the deleted code with new indexes available 42 U.S. BUREAU OF LABOR STATISTICS bls.gov

43 Account for Exceptions and Caveats in the Contract Terms If an index is recoded, that is the replacement is a direct substitute according to the BLS, this contract will instead use the recode. If an index becomes unavailable the supplier may propose a proxy index prior to December 31. The buyer will approve or disapprove in 10 business days. If there is not direct substitute or a proxy index approved, the next higher aggregate index available will be used. 43 U.S. BUREAU OF LABOR STATISTICS bls.gov

44 AVOID FORGETTING EVERYTHING UNTIL IT S TIME TO UPDATE PRICES By the time you revisit the contract, the PPI might have changed! Solutions Sign up for PPI Notices ( Try retrieving your index a couple times a year; if it becomes unavailable, check recent PPI Detailed Reports for resampling ( 44 U.S. BUREAU OF LABOR STATISTICS bls.gov

45 Other Uses of PPI Data for Procurement 45 U.S. BUREAU OF LABOR STATISTICS bls.gov

46 How to use PPI s aggregate indexes for Market Analysis PPI for Unprocessed Foods & Feeds; Apr-14; PPI for Processed Foods; Apr-14; PPI for Consumer Foods; Apr-14; Base: 1982= U.S. BUREAU OF LABOR STATISTICS bls.gov

47 How to use PPI s detailed indexes for Supply Chain Analysis Analysis using PPI Data *Indexes rebased to December 2004 = U.S. BUREAU OF LABOR STATISTICS bls.gov

48 How to use industry-level PPIs for Industry Analysis & Contract Decisions *Indexes rebased to January 2010 = U.S. BUREAU OF LABOR STATISTICS bls.gov

49 Contact Information Lana Conforti BLS Producer Price Index Program U.S. BUREAU OF LABOR STATISTICS bls.gov

50 Supplemental Slides 50 U.S. BUREAU OF LABOR STATISTICS bls.gov

51 PPI data mostly covers the supply chain, but other BLS data adds depth Price Inflation Data for Contract Price Adjustment Differences: Producer Price Index Prices received by domestic producers for goods and services Consumer Price Index Prices paid by consumers/households for goods and services Import Price Index Prices paid by purchasers to non-u.s. entities Wage Data for Contracts: Employment Cost Index Costs to employers of for employee compensation Wage Data for Analysis: At a Glance Summaries for Market Analysis By Industry ( By Areas of the U.S. ( The U.S. Economy ( 51 U.S. BUREAU OF LABOR STATISTICS bls.gov

52 PPI for Final demand combines data like the formula for GDP GDP 1Q 2015 $17.7 trillion = Consumption 69% C Government Purchases 18% Investment 17% Net Exports -3% Exports Imports 13% -16% + G + I + ( X - M ) PPI for Final Demand = (1) BEA.gov, Interactive Data, GDP & Personal Income, NIPA, released: July 30, 2015: (2) BLS.gov/PPI, PPI News Release Table 1 C 66% PPI for Personal Consumption + G + I + 8% PPI for Total Government Purchases 14% Private Capital Equip. & Investment PPIs X 12% PPI for Total Exports 52 U.S. BUREAU OF LABOR STATISTICS bls.gov

53 Price data from Industry #1 Industry Data Price data from Industry #2 Product Product Product Product Product Product Product Product Primary Products Secondary & Misc. Primary Products Secondary & Misc. Industry #1 PPI Family of PPIs Industry #2 PPI Items Item Commodity Data FD-ID Aggregations Item Group Item Inputs to Industries Aggregations Items Item 53 U.S. BUREAU OF LABOR STATISTICS bls.gov

54 Pitfalls Not accounting for revisions and errors Not accounting for missing or discontinued data Not keeping in touch with PPI Solutions Wait for revised data before escalating Recalculate upon the release of revision Only readjust if the percentage change is a certain amount different Do nothing (If you always escalate from the base, you ll make up for it next adjustment) Allow for the use of the next higher aggregate index (if it makes sense) Allow a proxy index Replace the index with its re-code Compare the deleted code with new indexes available Sign up for PPI Notices ( Try retrieving your index a couple times a year; if it becomes unavailable, check recent PPI Detailed Reports for resampling ( 54 U.S. BUREAU OF LABOR STATISTICS bls.gov