Academic journal article Monthly Labor Review

Effect of Updated Weights on Producer Price Indexes

Academic journal article Monthly Labor Review

Effect of Updated Weights on Producer Price Indexes

Article excerpt

Beginning with data for January 1992, die weights used to construct Producer Price Indexes (PPI) were updated to reflect 1987 shipment values of commodities. From January 1987 through December 1991, weights were based on 1982 shipment values. Most of the weight shifts reflected changes in the American economy during the 1982-87 period; however, some of die shifts are attributable to coincidental alterations in the structure or pricing procedures in the PPI.

Weights for individual products in the PPI are based on the shipment values of the commodity, as measured by the Census of Manufactures and other sources.(1) For categories broader than individual products, indexes are calculated using weighted averages of the components. Weights at all levels of aggregation and detail are implicitly adjusted each month in accordance with relative monthly price changes; that is, groupings or items whose prices are rising faster than average automatically attain proportionately increased weight, while weights for other categories simultaneously decrease. Over a period of years, however, such implicitly adjusted weights may no longer reflect contemporary production patterns. Therefore, it is occasionally necessary to revise the PPI weight structure by updating shipment values through what is called a major weight revision. Because the Census of Manufactures is conducted every 5 years, PPI weights ideally should also be updated on a 5-year cycle.

This latest major weight revision affected all PPI series derived from the commodity code system, including stage-of-processing, durability-of-product, and special commodity groupings. It did not affect the PPI series for the net output of selected industries and their products, whose weights are updated on an indusny-by-industry basis as part of the periodic resampling process; most of these industry and product weights already are based on 1987 shipment values. The proportional allocations of commodity series to the various stage-of-processing categories continue to be based on 1972 input-output data.

Relative importance data

Each December, the Bureau of Labor Statistics publishes PPI weights in the form of relative importance data, representing die value of shipments for a good or grouping as a proportion of the value of shipments for all goods within a broader category. In concept, shifts in relative importance resulting from a major weight revision are prompted by the change in the volume of units produced for a commodity series, relative to the average change for the larger category, such as finished goods.

Because the aggregate shipment value of commodities comprising each of the three major stage-of-processing categories--finished goods, intermediate goods, and crude goods--increased about 20 percent during the 1982-87 interval, an individual index whose shipment values also increased by 20 percent would show a revised relative importance approximately the same as its former relative importance. By the same logic, an item whose absolute shipment values remained unchanged over the 1982-87 period would show a sharp decline in relative importance after the shift to 1987 weights.

In a few cases, the shift in relative importance data for a PPI series was attributable not to any real-world economic change, but to the fact that BLS coincidentally made a technical change affecting that particular index at the same time that the major weight revision was made.

Example of weight shifts

The index for passenger cars (commodity code 141101) may serve as an example as to how and why PPI weights have changed. The December 1991 relative importance for passenger cars shifted from a 1982 weight of 5.616 with respect to Finished Goods (that is, with the weight for Finished Goods set equal to 100.000) to 7.759 on a 1987 weight basis, a climb of 38.2 percent. There were several economic reasons underlying this shift.

One important factor, which also played a role in many other weight shifts throughout the PPI, was the general economic rebound from the recession that dominated most of 1982. …

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