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December 2006, Vol. 129, No. 12
Price transmission: from crude petroleum to plastics products
Jonathan C. Weinhagen
Crude petroleum is an important input used in the production of organic chemicals, which are in turn used as inputs into the production of more-processed goods, such as plastics products. Prices for plastics products compose a substantial portion of several aggregate producer price indexes (PPI’s), and these indexes are often looked to as early indicators of consumer inflation. Price changes in crude petroleum, which are transmitted to prices for plastics products, would affect these aggregate PPI’s. A thorough knowledge of the relationship between prices for crude petroleum and prices for plastics products, therefore, would help economists understand and explain movements of aggregate PPI’s.
The main aggregate PPI’s that include prices for plastics products are the indexes for All Commodities, Finished Goods, Finished Goods Excluding Foods and Energy, Intermediate Goods, and Intermediate Goods Excluding Foods and Energy. In December 2005, plastics products accounted for 2.5 percent of the All Commodities PPI. (PPI commodity weights are derived from the 1997 Census of Manufactures and are updated by changes in PPI commodity indexes.) In addition, plastics products accounted for 1.2 percent of the Finished Goods PPI, 2.0 percent of the PPI for Finished Goods Excluding Foods and Energy, 4.6 percent of the Intermediate Goods PPI, and 6.1 percent of the PPI for Intermediate Goods Excluding Foods and Energy. Two of these main aggregate PPI’s exclude prices for energy, insulating them somewhat from energy price inflation; however, price changes in crude petroleum that are transmitted forward to organic chemicals and then to plastics products represent one way in which aggregate PPI’s that exclude energy prices may still be affected by energy price shocks. In 2005, crude petroleum accounted for 16.8 percent of the Crude Goods PPI and organic chemicals accounted for 4.2 percent of the Intermediate Goods PPI.
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