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Final demand-intermediate demand indexes.

The PPI FD-ID structure measures price change for goods, services, and construction sold to final demand and to intermediate demand. The FD-ID system replaced the PPI stage-of-processing (SOP) system as PPI's primary aggregation model with the release of data for January 2014. The FD-ID model expands coverage beyond that of the SOP system through the addition of services, construction, exports, and government purchases.

Compared with finished goods under the SOP system, the PPI for final demand goods includes nearly a 50 percent expansion of coverage. This increase can be traced to the addition of government purchases and exports. For overall final demand, expansion to include final demand services represents an even larger increase in coverage. In December 2012, final demand goods were about 34.5 percent of overall final demand, final demand services were roughly 63.5 percent, and final demand construction was about 2.0 percent of final demand. Within intermediate demand, coverage of services for intermediate demand resulted in about a 45 percent increase in coverage of the intermediate demand portion of the economy.

FD-ID indexes are constructed from commodity-based producer output price indexes. Commodities are allocated to aggregate indexes primarily based on the type of buyer. The main source of data used to determine the type of buyer is the "Use of commodities by industries, before redefinition," table from the Benchmark Input-Output Accounts of the U.S. In many cases, the same commodity is purchased by different types of buyers. As a result, commodities are often included in several FD-ID indexes. For example, regular gasoline is purchased for personal consumption, export, government use, and business use. The PPI program publishes only one commodity index for regular gasoline (wpu057104), reflecting sales to all types of buyers, and this index is used in all aggregations regardless of whether the gasoline is sold for personal consumption, as an export, to government, or to businesses. Proportions based on BEA "Use of Commodities" data are used to allocate the correct portion of the total weight of gasoline to each use category. In cases when buyer type is an important price determining characteristic, indexes are created based on specific buyer type. For example, within the PPI category for loan services, separate indexes for consumer loans and business loans were constructed. For more information relating to the FD-ID structure, see "A new, experimental system of indexes from the PPI program" in the February 2011 Monthly Labor Review.

Final Demand: The final demand portion of the FD-ID structure measures price change for commodities sold for personal consumption, capital investment, government, and export. The system is composed of six main price indexes: final demand goods; final demand trade services; final demand transportation and warehousing services; final demand services less trade, transportation, and warehousing; final demand construction; and overall final demand.

The final demand goods index measures price change for both unprocessed and processed goods sold to final demand. Fresh fruits sold to consumers and computers sold for capital investment are examples of transactions included in the final demand goods price index. The final demand trade services index measures price change for the retailing and wholesaling of merchandise sold to final demand, generally without transformation. (Trade indexes measure changes in margins received by wholesalers and retailers.) The final demand transportation and warehousing services index tracks price change for transportation of passengers, as well as, transportation of cargo sold to final demand, and also includes prices for warehousing and storage of goods sold to final demand. The final demand services less trade, transportation, and warehousing index measures price change for all services other than trade and transportation sold to final demand. Publishing, banking, lodging, and health care are examples of these services. The final demand construction index tracks price change for new construction, as well as maintenance and repair construction sold to final demand. Construction of office buildings is an example of a commodity that would be included in the final demand construction index. Lastly, the overall final demand index tracks price change for all types of commodities sold to final demand by combining the five final demand component indexes described above.

Intermediate Demand: The intermediate demand portion of the FD-ID system tracks price change for goods, services, and construction products sold to businesses as inputs to production, excluding capital investment. The system includes two parallel treatments of intermediate demand. The first treatment organizes intermediate demand commodities by type. The second organizes intermediate demand commodities into production stages, with the explicit goal of developing a forward-flow model of production and price change.

The intermediate demand by commodity type portion of the system organizes commodities by similarity of product. The system is composed of six main price indexes: unprocessed goods for intermediate demand; processed goods for intermediate demand; intermediate demand trade services; intermediate demand transportation and warehousing services; intermediate demand services less trade, transportation, and warehousing; and intermediate demand construction.

The unprocessed goods for intermediate demand price index measures price change for goods sold to businesses as inputs to production that have undergone no fabrication. Crude petroleum sold to refineries is an example of an unprocessed good sold to intermediate demand. The processed goods for intermediate demand index tracks price change for fabricated goods sold as business inputs. Examples include car parts sold to car manufacturers and gasoline sold to trucking companies. The index for trade services for intermediate demand measures price change for the services of retailing and wholesaling goods purchased by businesses as inputs to production. The intermediate demand transportation and warehousing services index measures price change for business travel, as well as, transportation and warehousing of cargo sold to intermediate demand. The intermediate demand services less trade, transportation, and warehousing index measures price change for services other than trade, transportation, and warehousing sold as inputs to production. Legal and accounting services purchased by businesses are examples of intermediate demand services excluding trade, transportation, and warehousing. Finally, the construction for intermediate demand index measures price change for construction purchased by firms as inputs to production. The index for construction for intermediate demand tracks price change for maintenance and repair construction purchased by firms.

The production flow treatment of intermediate demand is a stage-based system of price indexes. These indexes can be used to study price transmission across stages of production and final demand. This system is constructed in a manner that maximizes forward flow of production between stages, while minimizing back-flow of production. The production flow treatment contains four main indexes: intermediate demand stage 1, intermediate demand stage 2, intermediate demand stage 3, and intermediate demand stage 4.

Indexes for the four stages were developed by first assigning each industry in the economy to one of four stages of production, where industries assigned to the fourth stage primarily produce output consumed as final demand, industries in the third stage primarily produce output consumed by stage 4 industries, industries assigned to the second stage primarily produce output consumed by stage 3 industries, and industries assigned to the first stage produce output primarily consumed by stage 2 industries. The four indexes then track prices for the net inputs consumed by industries in each of the four stages of production. The stage 4 intermediate demand index, for example, tracks price change for inputs consumed, but not produced, by industries included in the fourth stage of production. Hence, the index tracks price change in inputs to industries that primarily produce final demand commodities (stage 4 producers primarily produce commodities sold to final demand).

Examples of heavily weighted goods-producing industries in stage 4 include the manufacture of light trucks and utility vehicles, automobiles, and pharmaceuticals. Retail trade, food service and drinking places, and hospitals are examples of heavily weighted service industries included in stage 4. Stage 4 also includes all new construction industries. Examples of goods consumed by stage 4 industries include motor vehicle parts, commercial electric power, plastic construction products, biological products, and beef and veal. Engineering services, machinery and equipment wholesaling, long distance motor carrying, and legal services constitute examples of services consumed by stage 4 industries.

Examples of highly weighted goods-producing industries included in stage 3 are motor vehicle parts manufacturing, animal (except poultry) slaughtering and processing, and semiconductor manufacturing. Services industries classified in stage 3 include wholesale trade; insurance carriers; architecture, engineering, and related services; and hotels and motels. Examples of goods consumed by stage 3 industries include slaughter steers and heifers, industrial electric power, and hot rolled steel bars, plates, and structural shapes. Services commonly consumed by stage 3 industries include commissions from sales of property and casualty insurance, business loans, temporary help services, and administrative and general management consulting services.

Petroleum refineries; electricity generation, transmission, and distribution; natural gas distribution; cattle ranching and farming; and plastic materials and resin manufacturing are among the goods-based industries assigned to stage 2. Services industries that are heavily weighted in stage 2 include management of companies and enterprises; non-depository credit intermediation; insurance agencies and brokerages; and services to buildings and dwellings. Goods commonly purchased by stage 2 industries include crude oil, natural gas, formula feeds, and primary basic organic chemicals. Services that are heavily weighted in the intermediate demand stage 2 index are legal services, business loans, and cellular phone and other wireless telecommunication.

Goods producing industries in stage 1 include oil and gas extraction, paper mills, and grain farming. Real estate, legal services, and advertising services are examples of highly weighted services industries included in stage 1. Examples of goods consumed by stage 1 industries are commercial and industrial electric power and gasoline. Services commonly consumed by stage 1 industries include solid waste collection, chemicals and allied products wholesaling, and guestroom or unit rental. It should be noted that all inputs purchased by stage 1 industries are by definition produced either within stage 1 or by latter stages of processing, leaving stage 1 less useful for price transmission analysis. For additional information on industry stage assignments, see http://www.bls.gov/ppi/industryflowstage.htm.
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Title Annotation:Technical Note
Publication:PPI Detailed Report
Date:Dec 1, 2014
Words:1655
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