Subjects > Producer & other price indices
|Subject: Producer Prices||.PI.......|
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Glossary Terms: Price index
Key statistical concept
Output Producer Price Indices (PPIs) can be described as indices designed to measure the average change in the price of goods and services as they leave the place of production valued at basic prices. The precise way PPIs are defined and constructed depend on by whom and for what they are meant to be used. In this context, national practices may differ and these differences may impact on international comparability between countries especially on aspects such as:
* the weighting and aggregation systems (source of weights, frequency of revising weights, calculation of higher level indices across industries or products using elementary price indices and the weights provided for elementary aggregates, aggregation by commodity, by stage of processing, by stage of production…);
* the sampling and collection of prices (sampling selection, sample size, product classifications…);
* the treatment of quality differences (several procedures may be used when an item change occurs, depending mainly on: the available information; the importance of the quality change; the size of the price difference arising from this change; the possibility of splitting the price difference into a pure price component and a quality component; the possibility of simultaneously collecting the prices of the two items at least once);
* the treatment of product substitution and new goods (to take account of the price behaviour of new and disappearing products but the old and new items are not likely to have the same price);
* the treatment of seasonal items (the supplies and prices of some products are subject to marked seasonal variations).
For a more comprehensive description of the methodologies for collecting price information and compiling these indices, please refer to the Producer Price indices: Comparative Methodological Analysis and to the IMF’s Producer Price Manual: Theory and Practice.
Glossary Terms: Producer price index
PPIs are presented as an index where the year 2005 is the base year. It should be noted that this reference base year may be arbitrarily chosen and does not necessarily reflect the year to which underlying weights relate.
The OECD calculates three area totals or ‘zones’ (OECD-Total; OECD-Europe; Major seven) for the PPI for manufacturing for domestic market. Five countries (Australia, Canada, New Zealand, Switzerland and United-States) do not produce such PPI and PPI for total market are used as a proxy. These area totals are annually chain-linked Laspeyres indices where the country weights for each individual link are based on the previous year’s Gross Domestic Product expressed in the relevant purchasing power parity (PPP). Hence the aggregate indices are subject to revision as a result of revisions to the national accounts and the PPPs. In general, new weights for the most recent complete year are incorporated in either November or December of each year.
For currently used weights, please see: http://www.oecd.org/dataoecd/45/50/44119636.xls
Recommended uses and limitations
PPIs provide an indication of the change in the prices received by domestic producers for their outputs or of the change in prices paid by domestic producers for their intermediate inputs. PPIs can also be used as a deflator of nominal values of output or intermediate consumption for the compilation of production volumes and for the deflation of nominal values of capital expenditures and inventory data for use in the national accounts. However the international comparability of country data is largely affected by how each country addresses the key methodological issues outlined above under key statistical concepts used.
PPIs are generally closely monitored by central banks in their assessment of inflation pressures within an economy, and may also be used for price escalation in certain types of business contracts.