[Federal Register Volume 76, Number 95 (Tuesday, May 17, 2011)]
[Notices]
[Pages 28467-28469]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-12042]


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DEPARTMENT OF LABOR

Bureau of Labor Statistics


Comment Request

AGENCY: Bureau of Labor Statistics.

ACTION: Notice of solicitation of comments.

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SUMMARY: To expand the scope of coverage for the Producer Price Index 
(PPI), BLS recently developed an experimental aggregation system that 
includes price changes for goods, services, and construction sold to 
all portions of final demand and intermediate demand.

DATES: Written comments must be submitted to the office listed in the 
ADDRESSES section of this notice on or before July 18, 2011.

ADDRESSES: Send comments to Jonathan Weinhagen, Producer Price Index, 
Bureau of Labor Statistics, Room 3650, 2 Massachusetts Avenue, NE., 
Washington, DC 20212 or by e-mail to: weinhagen.jonathan@bls.gov.

FOR FURTHER INFORMATION CONTACT: Jonathan Weinhagen, Producer Price 
Index, Bureau of Labor Statistics, telephone number 202-691-7709 (this 
is not a toll-free number), or by e-mail to: 
weinhagen.jonathan@bls.gov.

SUPPLEMENTARY INFORMATION: 

I. Background

    Currently, the Bureau of Labor Statistics (BLS) uses the stage-of-
processing (SOP) system as the key structure for analyzing producer 
prices. This system aggregates commodity price indexes for processed 
and unprocessed goods and is organized into three stages: Finished 
goods, intermediate goods, and crude materials for further processing. 
Over the past 20 years, the BLS has expanded Producer Price Index (PPI) 
coverage to include price indexes for many service and construction 
activities, but the SOP system continues to include only goods indexes. 
The PPI program recently developed an experimental aggregation system 
that includes goods price indexes as well as service and construction 
price indexes for products sold to all portions of final demand 
(personal consumption, capital investment, government use, and export) 
and to intermediate demand (business inputs, excluding capital 
investment). The experimental aggregation system was introduced with 
the release of January 2011 data in February 2011. This new system is a 
model that greatly expands PPI coverage of the United States economy.

[[Page 28468]]

    In developing the experimental aggregation system, two main 
criteria were considered. First, the system should be designed in such 
a way as to alleviate or minimize problems resulting from multiple 
counting. Second, the system should be analytically useful. Multiple 
counting can lead to overstated or understated measures of inflation. 
Multiple counting occurs when the price for a specific commodity and 
the inputs to production for that same commodity are included in an 
aggregate index. Before 1978, for example, the PPI program highlighted 
the all commodities index as its primary aggregate index. This index 
aggregates prices for all goods sold in the economy, using weights that 
reflect sales to all portions of intermediate and final demand. The all 
commodities index was the subject of serious criticism when petroleum 
prices spiked in the 1970s. Price change, as measured by the all 
commodities index, was seen as exaggerated because the index included 
both gasoline sold for final demand and crude petroleum, the primary 
input used in the production of gasoline. The SOP system substantially 
reduced multiple counting by separating goods into three stages: Crude, 
intermediate, and finished.
    The second criterion is that the aggregation system be analytically 
useful. The SOP system is more analytically useful than the all 
commodities index, as the system potentially allows price changes to be 
tracked through the various segments of the economy. In developing an 
aggregation system that incorporates prices for services and 
construction, the possible analytical functions of the system were 
considered.
    The new PPI aggregation system was designed to satisfy the two 
criteria identified earlier. To avoid multiple counting, the system 
separates final-demand transactions from intermediate-demand 
transactions and, in some cases, voids instances of multiple counting. 
One of the reasons the system is useful for analysis is that it 
combines commodity indexes into meaningful final-demand and 
intermediate-demand aggregates. The aggregates convey information about 
the types of commodities contributing to inflation at both the final 
demand level and at earlier stages of production, and can be used to 
track price change through the economy.

II. Final Demand

    The final demand segment of the PPI experimental aggregation system 
tracks price change for commodities--goods, services, and 
construction--sold by producers to all portions of final demand 
(personal consumption, capital investment, government, and export).\1\ 
The final demand segment of the experimental aggregation system is 
composed of six main price indexes: Final demand goods, final demand 
construction, final demand transportation services, final demand trade 
services, final demand traditional services, and overall final demand. 
The experimental final demand goods index measures price change for 
both unprocessed and processed goods sold to final demand. Fresh fruits 
sold to consumers or computers sold as exports are examples of 
transactions included in this index. The final demand construction 
index tracks price change for new construction as well as maintenance 
and repair construction sold to final demand. Construction of office 
buildings is an example of a commodity in this index. The final demand 
transportation services index tracks price change for transportation of 
passengers and cargo sold to final demand and includes prices for 
warehousing and storage of goods sold to final demand. The final demand 
trade services index measures price change for the retailing and 
wholesaling of merchandise sold to final demand, generally without 
transformation. The final demand traditional services index tracks 
price change for services other than trade and transportation services 
sold to final demand. Publishing, banking, lodging, and health care are 
examples of traditional services in the index. The overall final demand 
index tracks price change for all types of commodities sold to final 
demand and is constructed by combining the five final demand indexes 
described above.
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    \1\ All PPI aggregate indexes, including the SOP indexes and 
experimental aggregation indexes, are constructed from producers' 
output prices. In both the SOP system and experimental aggregation 
system, commodity prices are aggregated according to the type of 
buyer, and producer output prices are used as a proxy for actual 
prices paid by the buyer. In many cases, the same commodity is 
purchased by different types of buyers and is therefore included in 
more than one aggregate index. In these cases, the same PPI 
commodity index often is used in all aggregations. 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 (wpu057104), and this index is 
used in all aggregations regardless of whether the gasoline is sold 
for personal consumption, as an export, to government, or to 
businesses.
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III. Intermediate Demand

    The intermediate demand portion of the PPI experimental aggregation 
system tracks price change for goods, services, and construction 
products sold to businesses as inputs to production, excluding capital 
investment. In order to meet the needs of different data users, the 
experimental aggregation system includes two separate treatments of 
intermediate demand. The first treatment organizes intermediate-demand 
commodities by commodity type and is structurally similar to the final 
demand portion of the system. The second approach organizes 
intermediate demand commodities into stages by production flow 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 portion of the experimental aggregation system organizes 
indexes for commodities sold to businesses, where types include goods, 
services, and maintenance and repair construction. The system is 
composed of six main price indexes: Unprocessed goods for intermediate 
demand, processed goods for intermediate demand, intermediate demand 
construction, intermediate demand transportation services, intermediate 
demand trade services, and intermediate demand traditional services. 
The unprocessed-goods-for-intermediate-demand price index measures 
price change for goods that have undergone no fabrication and will be 
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 intermediate demand construction index measures price 
change for construction purchased by firms as inputs to production. 
Because new construction is categorized in the final demand portion of 
the economy, this index tracks price change for maintenance and repair 
construction purchased by firms. The intermediate demand transportation 
services indexes measure price change for business travel as well as 
transportation and warehousing of cargo sold to intermediate demand. 
The index for intermediate trade services measures price change in the 
service of retailing or wholesaling goods purchased by businesses as 
inputs to production. Finally, the intermediate traditional services 
price index tracks price change in traditional services purchased by 
firms as inputs to production. Legal and accounting services purchased 
by businesses are examples of intermediate

[[Page 28469]]

traditional services. The system does not include an overall 
intermediate demand index since this index would have severe multiple 
counting problems.
    Intermediate-demand-by-production-flow. The production flow 
treatment of intermediate demand within the experimental aggregation 
system is a stage-based system of price indexes. The stage-based 
indexes can be used to study price transmission relationships between 
intermediate-demand stages, and to final demand. The production flow 
treatment contains four main indexes: Intermediate-demand stages 1 
through 4.
    A four-step process was used by the PPI program to develop the 
intermediate-demand-by-production-flow system. The first step in the 
process of developing stages was to determine the total production of 
each industry in the economy. In general, industries are classified as 
primary producers of specific goods or services; however, industries 
may also be secondary producers of other goods or services. The first 
step therefore requires determining both the primary production and 
secondary production of each industry in the economy. The 2002 BEA 
``Make of Commodities by Industries'' table was used for this purpose.
    The second step in developing stages was to ascertain where the 
total output of each industry is consumed. This step requires 
determining, for each industry, the portion of the industry output 
consumed as final demand and the portion consumed as intermediate 
demand. For the intermediate-demand portion, determining which specific 
industries are consuming the industry's output also is required. BEA 
2002 ``Use of Commodities by Industry'' data were employed to make this 
determination.
    The third step in developing stages was to assign industries to 
stages of production. The PPI program chose the criterion of maximizing 
net forward flow within the system to assign industries to stages. Net 
forward flow is defined as (forward shipments of the industry stage + 
inputs received from previous stages of process)--(backward shipments 
of the industry stage + inputs received from forward stages of 
process).
    The PPI program implemented a two-step procedure to attempt to 
maximize net forward flow. In the first step, a set of rules was used 
to assign industries to stages and select the appropriate number of 
stages for the system. The system that the PPI program eventually chose 
is a four-stage system. The set of rules used to assign industries to 
the four stages is summarized as follows:
     Assign industry to stage 4 if shipments sold to final 
demand >=75 percent of industry production.
     Assign industry to stage 3 if shipments sold to final 
demand and to stage 4 >=65 percent of industry production and shipments 
sold to final demand <75 percent of production.
     Assign industry to stage 2 if shipments sold to final 
demand, to stage 4, and to stage 3 >=65 percent of industry production; 
and shipments sold to final demand and to stage 4 <65 percent of 
production; and shipments sold to final demand <75 percent.
     Assign industry to stage 1 if it does not meet the 
conditions of stage 4, 3, or 2.
    Before selecting the number of stages and set of rules just 
described, the PPI program examined many different sets of rules and 
numbers of stages. It eventually chose the aforementioned system 
because it performed very well in terms of maximizing net forward flow 
and minimizing internal flow (shipments produces and consumed in the 
same stage of production).
    After the assignment of industries to stages by use of the 
aforementioned rules, the second step in the procedure to maximize net 
forward flow was to examine the effects on net forward flow of moving 
individual industries to stages to which they were not originally 
assigned. In cases in which there were substantial gains to net forward 
flow industries were left in the new stage.
    The PPI production-flow-based system exhibits strong forward flow 
and little backflow. After weighting, 83.6 percent of transactions in 
the system are forward flowing, 5.7 percent are back flowing, and 10.7 
percent are internally flowing.
    The final step in constructing stages for the production-flow-based 
intermediate demand indexes was to determine the commodities to be 
included and weights to be used in the intermediate demand indexes. It 
is important to understand that these indexes track prices for inputs 
consumed by industries in each of the four stages of production, as 
opposed to prices for the output produced by industries in each of the 
four stages of production. These indexes also exclude prices for inputs 
both produced and consumed within an industry production stage, thereby 
eliminating any multiple counting of price change. The fourth 
intermediate demand index, for example, tracks price change for inputs 
consumed, but not produced, by industries included in the fourth stage 
of production. Recall that industries classified in the fourth stage of 
production mostly produce goods sold to final demand. The stage 4 
intermediate demand index therefore measures price change in the inputs 
to production of industries that produce primarily final-demand goods 
(stage 4 producers).

IV. Further Information

    For further information about the new PPI experimental aggregation 
system, please visit http://www.bls.gov/ppi/experimentalaggregation.htm. The experimental aggregation Web page 
contains information on relative importance figures for categories, 
various methodological articles from the Monthly Labor Review and PPI 
Detailed Report, a table showing the industry stage assignments in 
intermediate demand by production flow, a list of areas of non-
coverage, and instructions for obtaining time series data.

V. Desired Focus of Comments

    Comments and recommendations are requested from the public on the 
new PPI experimental aggregation system. The concepts, methods, and 
definitions described here may change based on input from the public 
and experience gained in data collection.
    The BLS welcomes comments on any aspect of the experimental 
aggregation system but is especially interested in comments on:
    1. The inclusion of the weight for government purchases and exports 
in the new system.
    2. The usefulness of the new experimental aggregation system, 
including either or both treatments of intermediate demand--
intermediate-demand by production flow and intermediate demand by 
commodity type.
    3. The criterion of maximizing net forward flow to develop the 
intermediate demand by production flow segment of the experimental 
aggregation system.
    4. The usefulness of the commodity groupings. The final demand and 
intermediate demand by commodity type portion of the experimental 
aggregation system group price indexes by type of commodities, where 
commodity types include unprocessed goods, processed goods, traditional 
services, transportation services, trade services, and construction.

    Signed at Washington, DC, this 11th day of May 2011.
Kimberley Hill,
Chief, Division of Management Systems, Bureau of Labor Statistics.
[FR Doc. 2011-12042 Filed 5-16-11; 8:45 am]
BILLING CODE 4510-24-P