Academic journal article Monthly Labor Review

Effect of 1992 Weights on Producer Price Indexes

Academic journal article Monthly Labor Review

Effect of 1992 Weights on Producer Price Indexes

Article excerpt

Updated weights reflecting 1992 values of shipments of commodities resulted in increasing relative importance for food at all stages of processing, for energy at the finished and intermediate stages, and for basic industrial materials at the crude stage

Effective with the release of data for January 1996, the weights used to construct the Producer Price Index (PPI) were updated to reflect the 1992 values of shipments of commodities. From 1992 through 1995, weights were based on 1987 values of shipments. The PPI is constructed by obtaining the prices, each month, of a set of goods representative of the marketed output of domestic industries in some designated base period. Although the weights of items included in the PPI change continuously solely in response to different rates of price change among the various items, production patterns are influenced by factors other than price changes, such as technological advancement and changes in demand. It is therefore necessary periodically to restore the representativeness of the mix of goods that go into making up the PPI to the current mix of domestic outputs by comprehensively recomputing the weights of PPI items based on the value of shipments in a more recent period.

Weights for specific products are based on their value of shipments, as measured by the Census of Manufactures, Census of Mining, Census of Services, and Census of Agriculture.(1) For overall groupings of products, relative importance figures are calculated by aggregating specific product weights together, resulting in a weighted average of the components.

The 1996 weight revision affected all series within the Producer Price Index, including traditional commodity code indexes, industry net output indexes, stage-of-processing indexes based on both the commodity and the net output classification system, durability-of-product indexes, and special commodity groupings. The proportional allocation of commodity series to specific stage-of-processing categories remains based on 1972 input-output data.

Relative importance data

Producer Price Index weights are published in the form of relative importance data. This type of data represents a good's or grouping's value of shipments as a proportion of the total value of shipments for a broader category. Shifts in relative importance resulting from a major weight revision are the result of changes in production volume and selling price for individual series, relative to the average change of all other items within a broader category.

From 1987 to 1992, the aggregate value of shipments of commodities that make up the three major stage-of-processing categories (finished goods, intermediate goods, and crude goods) increased about 20 percent. Thus, an individual item whose value of shipments also increased about 20 percent would have a revised relative importance about the same as its former relative importance. By contrast, an item whose actual value of shipments remained the same from 1987 to 1992 would have a revised relative importance about 20 percent less than its former relative importance.

The U.S. economy expanded at a robust pace between 1987 and 1992, with the gross domestic product increasing 33 percent during that period. Personal consumption expenditures rose more than 35 percent, industrial production rose 6.5 percent, and business investment expenditures increased by more than a third. These factors combined to result in the overall increase in value of shipments of about 20 percent during the period.(2)

Example of weight shifts

The index for civilian aircraft (commodity code 142102) may serve as an example as to how and why weights have changed. The December 1995 relative importance of civilian aircraft shifted from 2.055 under the 1987 weight base to 3.351 under the 1992 weight base, an increase of 63.1 percent. There were several reasons for this change.

Economically, the Nation was coming out of a recession in 1992 caused by the Persian Gulf crisis in late 1990 and 1991. …

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