August 14, 1998
The Bureau of Labor Statistics (BLS) recently reported large increases in the Producer Price Index (PPI) for prescription pharmaceuticals (series code WPU0635). This fact sheet provides more information on these increases, summarizes their effects on aggregate indexes, and briefly describes PPI index calculation methodology.
(1) The PPI for prescription pharmaceuticals increased 22.3 percent in the 12 months ended in July 1998. What accounts for this increase?
The PPI for prescription pharmaceuticals is a weighted average of some 47 separate indexes for individual therapeutic categories of drugs. In the 12 months ended in January 1998, the PPI for prescription pharmaceuticals rose 3.0 percent. The run up in the six months since January in the prescription pharmaceuticals index is primarily the result of a large increase in the index for the psychotherapeutics category (series code WPU06359925). That index rose 12.7 percent in February, 183.4 percent in March, and 5.7 percent in July. Over the six-month span, the index for psychotherapeutics rose from a level of 445.2 in January to a level of 1503.0 in July 1998.
(2) What was the impact of the increase in the psychotherapeutics index on aggregate producer price indexes?
The recent run up in the psychotherapeutics index had a considerable impact on aggregate producer price indexes. Prices for prescription drugs exclusive of psychotherapeutics rose 6.1 percent in the 12 months ended in July 1998; the overall prescription drugs index rose 22.3 percent over that period. Similarly, the PPI for finished goods exclusive of psychotherapeutics decreased 0.6 percent in the year ended in July 1998 while the PPI for Finished goods decreased 0.3 percent over that 12-month period.
(3) Could the recent large increases in the psychotherapeutics index possibly be accurate?
The January-July increases in this index accurately reflected the actual price data reported by the firms sampled by the PPI for psychotherapeutics. As described in (4) below, however, estimates of price change as measured by the PPI are based on scientifically selected samples of products and producers and thus are subject to the variability inherent in the sampling process. Because the recent large increase in the psychotherapeutics index resulted from price changes by a small number of producers for a small number of individual drugs, sampling variability may well have played a role in the recent behavior of the PPI for prescription pharmaceuticals.
(4) How is the PPI put together?
PPI index calculation involves two stages. In the first, "basic" indexes for product categories are calculated by averaging the price movements of individual items. Each item carries a weight based on its value of shipments as reported by the producer at the time of its introduction to the index. These items represent both themselves and all non-sampled items that are members of the product category universe. The average number of items in each of the 47 basic indexes for prescription drug therapeutic categories is 13.
In the second stage of PPI index calculation, basic indexes are combined with appropriate weights into a series of successively broader aggregate indexes. The psychotherapeutics index is an aggregate index that combines three basic indexes: minor tranquilizers, major tranquilizers, and antidepressants. The weight for a basic index is based on the value of shipments for that product category. This weight, as well as that for all other basic indexes, comes from the 1992 economic censuses of the U.S. Department of Commerce. The weight is effectively updated monthly by the price movement for the basic index relative to the price movement for all other basic indexes.
As of December 1997, the weight, or relative importance, of psychotherapeutics was 6.794 percent of the weight for prescription pharmaceuticals, which in turn accounted for 1.924 percent of the PPI Finished goods index.
(5) How is the sample size for a producer price index determined?
Each industry covered by the PPI has an individually designed sample. The designated sample size for an industry is a function of its size, degree of concentration, the relative variance of its historical price index, and the rate at which its firms voluntarily agreed to participate in past PPI surveys. When last sampled in 1993, the designated sample size for the Pharmaceutical Preparations industry was 965 items from 124 manufacturers. These sample items were allocated to basic indexes for therapeutic categories proportional to the size of categories and the relative variance of historical category price indexes.
BLS is currently implementing a long-term strategy to significantly reduce the number of PPI basic indexes and significantly increase the average number of price quotes used for each such index. The new design is being deployed for industries covered by the PPI as each is resampled between 1997 and 2004. The Pharmaceutical Preparations industry is scheduled for resampling in 1999. For more information on the new design, see "Change in PPI Publication Structures for Resampled Industries Introduced in January 1997," PPI Detailed Report, Data for January 1997.
(6) Which company(ies) reported the large increase(s) reflected in the psychotherapeutics index?
All respondents to BLS surveys participate on a voluntary basis. In order to obtain sensitive economic data that otherwise might not be available, the Bureau keeps strictly confidential the identity of respondents to all of its surveys.
(7) Is the recent increase in the psychotherapeutics index subject to revision?
Every PPI is systematically recalculated four index months after it is first published to take into account any late survey reports or price corrections supplied by sampled firms. The latest final recalculated PPI is for the March 1998 index month. The data for the four index months since March are subject to revision, but only to reflect any late survey reports or price corrections that might be supplied by firms.
For more information on the PPI, call the Section of Index Analysis and Public Information at (202) 691-7705.
Bureau of Labor Statistics August 14, 1998
Last Modified Date: October 16, 2001