Producer Price Indexes

PPI Final Demand-Intermediate Demand Indexes

Overview

The Producer Price Index (PPI) measures average changes in prices received by domestic producers for their output. Most of the information used in calculating PPIs is obtained through the systematic sampling of industries. As of January 2014, the PPI program includes the following index groupings:

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 system expands coverage in its aggregate measures beyond that of the SOP system through the addition of services, construction, exports, and government purchases.

FD-ID indexes are constructed from commodity-based producer output price indexes. These commodity-based output price indexes are allocated to aggregate categories based on proportions of use by type of buyer. The main source of data used to determine buyer type is the table titled “Use of commodities by industries, before redefinition” from the Benchmark Input–Output Data Tables of the United States, produced by the U.S. Bureau of Economic Analysis (BEA). The two primary classes of buyers included in the FD–ID system are final demand (personal consumption, capital investment, government, export) and intermediate demand (business purchases, excluding capital investment). In many cases, the same commodity is purchased by different buyer types, so 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, reflecting sales to all types of buyers. It is this index that is used in all FD–ID aggregations, regardless of whether the gasoline is sold for personal consumption, as an export, to government, or to businesses, with differences accounted for in the applicable weights to each aggregate FD or ID index. In some cases, buyer type is an important price determining characteristic, and results in commodity indexes being created on that basis. For example, within the PPI category for loan services, separate indexes for consumer loans and business loans were constructed. In this case, the commodity index for consumer loans would be included in the final demand index and the commodity index for business loans would fall under intermediate demand.

For more information relating to the construction of the FD-ID system, see “A new, experimental system of indexes from the PPI program” in the February 2011 Monthly Labor Review, or visit the, FD-ID Aggregation System web page. More detail about overall PPI methodology is available from the PPI chapter of the BLS Handbook of Methods.

Final demand

The final demand portion of the FD-ID system measures price change for commodities sold as personal consumption, capital investment, government purchases, and exports. 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 excluding 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 fruit sold to consumers and computers sold as capital investment are examples of transactions included in the final demand goods price index. The final demand trade services index measures changes in margins received 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 and 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.

The indexes listed below provide a high-level outline of the final demand publication structure:

Final Demand Final demand goods Final demand foods Final demand energy Final demand goods less foods and energy Final demand services Final demand trade services Final demand transportation and warehousing services Final demand services less trade, transportation, and warehousing Final demand construction

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.

Intermediate demand by commodity type. The intermediate demand by commodity type treatment within the FD-ID 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 grouping for processed goods for intermediate demand is equivalent to the SOP grouping for intermediate materials, supplies, and components, and the grouping for unprocessed goods for intermediate demand corresponds with the SOP grouping for crude materials for further processing.

The unprocessed goods for intermediate demand index measures price change for goods that have undergone no fabrication and are sold to businesses as inputs to production. 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 changes in margins received 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 tracks price change for non-trade and non-transportation services purchased by firms 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. Since new construction is categorized in the final demand portion of the economy as capital investment, the construction for intermediate demand index tracks price change for maintenance and repair construction purchased by firms.

The indexes listed below provide a high-level outline of the intermediate demand by commodity type publication structure:

Processed goods for intermediate demand Materials and components for manufacturing Materials for manufacturing Components for manufacturing Materials and components for construction Materials for construction Components for construction Processed fuels and lubricants for intermediate demand Containers for intermediate demand Supplies for intermediate demand Supplies to manufacturing industries Supplies to nonmanufacturing industries

Unprocessed goods for intermediate demand Unprocessed foodstuffs and feedstuffs Unprocessed nonfood materials Unprocessed nonfood materials except fuel Unprocessed fuel

Services for intermediate demand Trade services for intermediate demand Trade services for manufacturing industries Trade services for nonmanufacturing industries Transportation and warehousing services for intermediate demand Transportation of passengers for intermediate demand Transportation and warehousing of goods for intermediate demand Services less trade, transportation, and warehousing for intermediate demand Services less trade, transportation, and warehousing for manufacturing industries Services less trade, transportation, and warehousing for nonmanufacturing industries Construction for intermediate demand

Intermediate demand by production flow. 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. Indexes for the stages track prices for the net inputs consumed by industries in each of the four stages of production. For example, the stage 4 intermediate demand index tracks price change for inputs consumed, but not produced, by industries included in the fourth stage of production. Hence, the index measures price change in the inputs to production of industries that primarily produce final demand commodities. The main sources of data used to develop these indexes were the BEA tables titled “Use of commodities by industries, before redefinition” and “Make of commodities by industries, before redefinition.”

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 and related activities; insurance agencies, brokerages, and related activities; and services to buildings and dwellings. Goods commonly purchased by stage 2 industries include crude petroleum, 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. 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.

The indexes listed below provide a high-level outline of the intermediate demand by production flow publication structure:

Stage 4 intermediate demand Inputs to stage 4 goods producers Goods Services Inputs to stage 4 services producers Goods Services Construction Inputs to stage 4 construction producers Goods Services Stage 3 intermediate demand Inputs to stage 3 goods producers Goods Services Construction Inputs to stage 3 services producers Goods Services Construction Inputs to stage 3 construction producers Goods Services Stage 2 intermediate demand Inputs to stage 2 goods producers Goods Services Construction Inputs to stage 2 services producers Goods Services Construction Stage 1 intermediate demand Inputs to stage 1 goods producers Goods Services Construction Inputs to stage 1 services producers Goods Services Construction Inputs to stage 1 construction producers Goods Services

Special groupings

In addition to the FD-ID structures described in the prior sections, a number of supplemental indexes have been developed in order to provide data users with index groupings not available through the primary FD-ID structures. Some examples of these special grouping indexes include:

Final demand Final demand less foods, energy, and trade services Final demand goods plus final demand distributive services Final demand distributive services Total finished (the personal consumption and private capital investment portion of final demand) Finished goods Total exports Government purchased goods Government purchased servicesPersonal consumption Personal consumption goods plus personal consumption distributive services

Intermediate demand Processed energy goods Processed foods and feeds Processed materials less foods and energy Processed goods plus intermediate distributive services Unprocessed foodstuffs and feedstuffs Unprocessed energy materials Unprocessed nonfood materials less energy Total goods inputs to stage 4 intermediate demand Total services inputs to stage 4 intermediate demand Total goods inputs to stage 3 intermediate demand Total services inputs to stage 3 intermediate demand Total goods inputs to stage 2 intermediate demand Total services inputs to stage 2 intermediate demand

Additional information

The PPI homepage contains additional information regarding PPI data and methodology. For more information, contact the PPI Section of Index Analysis and Public Information at (202) 691-7705 or ppi-info@bls.gov

Last Modified Date: February 7, 2014

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