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Price transmission within the PPI for intermediate goods
Jonathan Weinhagen
In 1978, the Bureau of Labor Statistics began emphasizing the Producer Price Index (PPI) commodity based stage-of-processing system as its main analytical structure for tracking changes in wholesale prices. This system organizes manufacturers’ selling prices according to the level of processing the commodity has undergone. The three main stage-of-processing categories are crude goods, intermediate goods, and finished goods.1 For purposes of analysis, the Consumer Price Index (CPI) could be added to the structure as a fourth "stage of processing."
The Bureau’s main aggregate PPI prior to 1978, the PPI for All Commodities, includes price changes from all stages of wholesale processing. However, the all commodities index is criticized as a measure of aggregate inflation because multiple counting of prices for transactions at various stages of processing within the index may result in a magnified and distorted measurement of wholesale inflation. Multiple counting problems arise when price changes for basic commodities are passed forward through the stages-of-processing. For example, a price change in wheat that is passed forward to prices for flour and bread would be overemphasized in an aggregate index that includes price changes for all three commodities. The stage-of-processing system was developed, in part, to improve multiple counting issues within the PPI. Additionally, the stage-of-processing system allows for analysis of price transmission among the stages.
This excerpt is from an article published in the May 2005 issue of the Monthly Labor Review. The full text of the article is available in Adobe Acrobat's Portable Document Format (PDF). See How to view a PDF file for more information.
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Footnotes
1
For more information, see Bureau of Labor Statistics Handbook
of Methods, ch. 14, "Producer Price Indexes," on the Internet at www.bls.gov/opub/hom/pdf/homch14.pdf.
Consumer Price Index
Producer Price Indexes
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