Comparing PPI Energy Indexes to Alternative Data Sources
Klemmer, Katherine A., Kelley, Joseph L., Monthly Labor Review
The trend in measures constructed using alternative sources of price data for energy products tracks fairly well with changes in the Producer Price Index
The Bureau of Labor Statistics produces a family of indexes, called Producer Price Indexes, that measure the average change in prices received by domestic producers for their output. These indexes, updated monthly, are published at numerous levels of product aggregation and in a variety of classification schemes. Periodically, BLS reviews its indexes by comparing them with alternative measures of price trends. This article presents the results of one such test, which focuses on the important and price-volatile group of energy commodities, as arrayed within a stage-of-processing system of price indexes.
The stage-of-processing (SOP) system is one of the primary classification schemes used by BLS to develop Producer Price Indexes (PPIs). The sop indexes are commodity-based measures that regroup commodities at the subproduct class,(1) according to the class of buyer and the amount of physical processing or assembling the products have undergone. There are three major, or aggregate, sop categories of goods: finished, intermediate, and crude. Finished goods are defined as commodities that are ready for sale to the final user, which could be either an individual or a business firm. Examples include bread, gasoline, apparel, and passenger cars. Intermediate goods are materials, supplies, and components that have been partially processed but require further processing. Intermediate goods also consist of nondurable, physically complete goods purchased by business firms as inputs to their operations. Intermediate goods include flour, cotton yam, steel mill products, and lumber. Crude materials are defined as unprocessed commodities entering the market for the first time, such as crude petroleum, natural gas to pipelines, gravel, sand, steel scrap, and coal.(2)
Movement in aggregate PPIs, including movement in the stage-of-processing indexes, is driven in large part by the price fluctuations for energy commodities. This is due to the large relative importance of energy product indexes in the aggregate PPIs, as indicated in the following tabulation:
Stage-of-processing Relative category importance Finished energy goods as a part of total finished goods 13.58 Intermediate energy goods as a part of total intermediate materials 13.13 Crude energy materials as a part of total crude materials 36.17
Historically, Crude, Intermediate, and Finished energy PPIs experience large month-to-month price fluctuations. (See chart 1.) For example, the PPI for Crude energy materials increased 11.1 percent in November 1996 and 19.3 percent the following month. One of the factors driving this increase was a rise in natural gas prices: the index for Natural gas increased 33.8 percent in November 1996 and 39.9 percent in December 1996 due to low inventory levels. With storage levels already low due to the previous year's severe winter, the early onset of winter weather in 1996 caused a further drawdown of natural gas inventories, creating concern over supply shortages. The Crude energy materials index subsequently showed large decreases of 17.9 percent in February 1997 and 21.3 percent in March 1997, as prices for natural gas declined from the previous year's high.
[Chart 1 OMITTED]
Another example of energy price volatility occurred in 1990, as the result of Iraq's invasion of Kuwait. This event caused sharp increases in crude and refined petroleum prices, in anticipation of oil shortages caused by the hostilities. In August 1990, the Crude energy materials index increased 25.1 percent and the Finished energy goods index rose 8.96 percent. The PPI for Crude petroleum increased 62.4 percent and the PPI for Gasoline was up 17. …