Government Statistical ServiceMethodology Series No. X

Producer Price Indices:Principles and Procedures

Ian Richardson

March 1999

UK Data Archive Study Number 7022 - Prices Survey Microdata: Secure Access

C o n t e n t s P a g e

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3 C a l c u l a t i o n o f I n d i c e s 5

4 Sample r e c r u i t m e n t 8

5 New sampling scheme for home PPIs 9

6 Processing & Data Validation 10

7 Publication 12

8 Future developments 14

Annexes

A International comparisonsB Sample PPI price quotation returnC Sample EPI price quotation returnD Specification changes - treatmentE PPI Recruitment formF Sample PPI family treeG Sample PPI rebasing tableH Sample IPI rebasing tableI Sample EPI family treeJ Table to link between base years

1. Introduction

1.1 This manual updates Wholesale Price Indices: Principles and Procedures published in 1980. The old wholesalePrice Indices were relabelled Producer Price Indices in 1983 to better reflect the nature of the subject matter. In theyears since then, there have been several other important developments including:

• Use of statutory powers of collection• New technology to collect data• Reclassification of the indices to a new Standard Industrial Classification (SIC)• A new PPI sampling strategy

It was felt that the many changes since 1980 and the large amount of interest in the monthly Producer Price Indexjustify this new publication.

History

1.2 The Producer Price Index (PPI) has one of the longest histories of any economic statistic. The first PPI underits previous title of Wholesale Price Index (WPI) was published by the Board of Trade in 1903 in a parliamentarypaper on Wholesale and Retail Prices. The series ran from 1871, and represented the weighted arithmetic mean ofprice relatives of 45 commodities, mainly basic materials and foodstuffs. Prices were largely derived from theaverage values recorded at the time of import or export. In 1935, indices were rebased on 1930=100 and continuedto be published until 1955. These earlier indices were rather crude and did not attempt to measure prices offinished goods at all (though the need for such an index was appreciated as far back as 1903, as is made clearfrom the record of a discussion between Sir Henry Fountain of the Board of Trade and a Professor Nicholson). Adescription of these early statistics is contained in Stafford (1951), while the indices are shown in Mitchell (1971).

1.3 The present structure of the PPI largely derives from the mid 1950s. An article published in 1956 (Phillips(1956)) effectively sets out the concepts underlying the present set of indices. Since that time, there have beenseven rebasings but the basic concepts have remained unchanged.

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I n t r o d u c t i o n 1

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Basic concepts

1.4 The two main sets of indices which are published for the home PPI are: Output indices - the prices ofgoods produced by manufacturers in the United Kingdom for sale in this country, and Input indices - thematerials and fuel purchased by UK manufacturing industry as part of their current expenditure. Theseinclude imports of raw materials and semi-manufactured goods as well as home-produced inputs ofmaterials, fuel and semi-manufactured goods. The latter are generally represented by the output priceindices of the appropriate industry.

1.5 Output PPIs are commonly known as 'factory gate' prices to reflect the fact that they measure prices ofgoods before they are transferred to the distribution or retail sectors. This is a crucial difference between thePPI and the Retail Price Index (RPI), also produced by ONS, which measures prices of goods and servicespaid by households. Other important points are that PPIs reflect prices at the time of order rather thandelivery and should reflect actual prices achieved rather than any notional list price. An article comparingmovements in the RPI and PPI over the period 1990 to 1994 was published in Economic Trends in August1998 (Richardson and Baxter (1998)).

Uses of PPI

1.6 The PPI has three main categories of customers:

a) other parts of the Office for National Statistics, which use the data for deflating the national accounts,particularly the index of production, capital expenditure and stockbuilding

b) economists at the Treasury, the Bank of England, and City institutions, who regard the PPI as a measureof current inflationary processes in the overall economy. The DTI, MAFF and industrial economists also usePPIs for monitoring price pressures on sub-sectors of UK industry and

c) commercial customers, including MOD and its suppliers, who use the indices as an impartial measure ofprices for contractual purposes, and for comparing with their own patterns of purchases and sales.

International comparisons

1.7 All major Western countries produce a producer price index (PPI). A table comparing the methods usedis shown at Annex A.

Export prices

1.8 Export price indices (EPIs) have been collected since 1993. These are collected in a broadly similar wayto PPIs but prices for export rather than the UK market are requested. EPIs have been used to deflate theexport component of the Index of Production, as well as the value of exports of manufactured goodsrecorded in the Balance of Payments, since the publication of the 1996 National Accounts. The rationale fordeveloping EPIs to deflate these flows within the national accounts is set out in Williamson and Ruffles(1997). At present, EPIs cover around half of manufactured goods, and it is planned to steadily increase theircoverage over the next few years.

Import prices

1.9 Import prices covering raw materials and semi-manufactured products have always been collected aspart of the material and fuel input indices. The categories covered are divisions 00 to 68 of the StandardInternational Trade Classification (SITC). A recruitment exercise is currently under way to develop importprice indices (IPIs)covering capital goods as well as finished intermediate products.

Resources used

1.10 The present numbers of suppliers and items for the main PPI inquiries are (in round terms):

Suppliers ItemsPPI (home sales) 4,000 9,000Import Prices 400 900Export Prices 1,000 2,500

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1.11 The number of export price items is presently being extended and may increase to a maximum of5,000. The estimated total government costs of conducting the PPI, including export, import and servicesector prices were £2.0 million in 1997/98, and involved 52.2 staff years. Compliance costs for industry - thatis the estimated cost of the time spent by contributors in providing the data - were £200,000 in 1996/97.

Standard Industrial Classification

1.12 Since 1995, the Standard Industrial Classification (SIC) used in the PPI system has been the 1992version (SIC(92)) (ONS(1997a)). More detailed information was published in the Official Journal of theEuropean Community OJEC (1993), which also allows comparison with the Combined Nomenclature usedby Customs and Excise. SIC(92) is consistent with EUROSTAT (NACE Rev 2) and United Nations (ISIC Rev3) recommendations and allows consistent comparisons between European countries. Earlier classificationshave been

• 1980 SIC from 1983 to 1995• 1968 SIC from 1973 to 1983.

In terms of all manufacturing industry, the main differences between the most recent SICs have been:

• 1968 SIC to 1980 SIC Petroleum refining was excluded from all manufacturing, while output ofslaughterhouses was included in all manufacturing.• 1980 SIC to 1992 SIC Petroleum refining was included in all manufacturing.

A reasonable length of time-series is shown at the time of reclassification. Annex B shows a time series forthe highest-level indices reclassified onto SIC(92) back to 1974.

Publication

1.13 High-level PPIs are published first in a monthly PPI First Release. More detailed figures are publishedin Business Monitor MM22 - around 900 PPIs are produced each month. Results are also published in theCurrent Cost Accounting Monitor (MM17) and in the Aerospace and Electronics Cost Indices Monitor(MM19). Chapter 9 provides more details.

2. Price collection

Statutory basis

2.1 The collection of producer price indices, which had previously been voluntary, was moved to a statutorybasis in 1991. The move was to improve the quality of the overall and component indices and ensured agreater response to recruitment forms, particularly in areas such as aerospace and shipbuilding, wherecompanies were previously reluctant to provide data because of the complicated nature of their industries.Price collection in Great Britain is statutory under the Statistics of Trade Act 1947; and since 1993 has alsobeen statutory in Northern Ireland under Article 5 of the Statistics of Trade and Employment (NorthernIreland) Order 1988.

Prices requested

2.2 At the time of recruitment to the home PPI, ONS request that companies supply price quotations foritems which have the following attributes:

• are representative of the company’s production in the relevant heading which is a six-digit code within the1992 Standard Industrial Classification (see paragraph 6.3)

• are manufactured and sold within the UK. The definition of UK manufacture is that the nature of the goodmust be changed within the UK. As examples, assembly of imported parts within this country would beincluded, but not a simple repackaging of an imported good.

2.3 Prices are then requested on a monthly basis:

• the prices quoted should represent a price which would be achieved in a significant proportion of UK sales,after discounts and excluding VAT

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• the product must be quoted on the same basis each month - i.e. the same product and same terms of sale

• the product and terms of sale must be described in enough detail to ensure consistency each month

• the price must be recorded at the time at which the product is ordered. PPIs are published on this basis butfor such purposes as deflating turnover in certain industries, PPIs are lagged so that they relate to time ofdelivery.

• prices are ex-works price, i.e. excluding any delivery charge outside the factory.

2.4 The layout of the recruitment form is attached at Annex C and the monthly form at Annex D. The mostrecent price history is returned to the contributor. Prices should be recorded as well as the date of anychange. A contributor may choose to supply data in the form of a price index. Prices may be supplied up tothree months ahead.

The price averaged over the month as a whole is then calculated by the ONS.

Excise duties

2.5 The headline PPI includes excise duties on such items as tobacco, petroleum products and alcoholicdrinks. For analytical purposes, an additional all manufacturing PPI excluding excise duties is published inthe PPI First Release, so manufacturers in these industries are asked to provide prices both including andexcluding excise duties, and indices are published on both bases. Since 1998, the series excluding dutyhave been used for deflation in the national accounts, in line with international guidelines.

Average prices

2.6 Generally, contributors are discouraged from simply providing average prices covering all transactions ina particular month. Experience has indicated that such average prices tend to be very volatile and can beaffected by an occasional very large order. Such fluctuations reflect changes in customer mix rather thangenuine changes in prices. For this reason, contributors are asked to quote prices for a similar transactioneach month, though there are industries such as the manufacture of construction materials, e.g. bricks orcement, where average prices are accepted as a preferable alternative to unrealistic list prices.

Charge-out rates

2.7 It is difficult for contributors in particular industries such as ship-building and repair, to provide quotes asso much of their work is one-off in nature which means it is difficult to quote for the same product over aperiod of time. In such cases, hourly charge-out rates give an approximation to the trends for the product orservice itself, whilst keeping the compliance costs to a minimum. However, they can lead to distortions in notallowing for productivity increases over time and excluding any price movements in the raw materialsinvolved.

2.8 There are exceptions but this method of pricing is generally best avoided if possible. Where labourcharge-out rates are used, ONS staff are advised to:

• ensure they cover one specific type of a constant mix of labour• avoid industries where productivity gains or development are likely to be rapid• avoid industries where the materials element in prices is high• ensure the quoted rate reflects what the customer actually pays (rather than an artificial 'list price' rate).

2.9 Rates per tonne of material are more likely to be satisfactory than labour charge-out rates, but ONS staffare asked to:

• ensure the rate is what the customer pays after discount• include the cost of the material and ensure this is specified precisely• ensure quotes cover specific products or product types.• ensure the working of the material is the predominant element in the product being quoted for. Designcharges should be excluded.

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Import price collection

2.10 Prices of imported raw materials and semi-manufactured goods (defined as divisions 01 to 68 of theStandard International Trade Classification) are also collected as part of the PPI system. Contributors areselected from a list of importers supplied by Customs and Excise. They can either be manufacturers in theirown right or may operate as importers who then sell on to manufacturers; in the former case they shouldrepresent the price they typically pay for the product quoted, in the latter case they should record the pricethey would charge to a UK manufacturing company.

2.11 They can either be manufacturers in their own right or may operate as importers who then sell on tomanufacturers; in the former case they should represent the price they typically pay for the product quoted,in the latter case they should record the price they would charge to a UK manufacturing company.

Export price collection

2.12 Export prices are collected on a separate form from the home PPI. The crucial differences are:

• goods must be manufactured in the UK and destined for export• quotes are requested for both EC and non-EC destinations• prices should be supplied in the currency which their overseas customer pays• the ideal definition is FOB (free on board) but other terms are acceptable, on the grounds that trends on thevarious definitions should be similar. Prices should be provided on a consistent basis - i.e. the same good tothe same destination. Prices to another part of the same company are generally avoided, but will beaccepted if necessary. In such a case, export prices as quoted on the company’s INTRASTAT form orCustoms documentation are acceptable.

Field officers

2.13 A recent innovation is the use of a field officer to liase with contributors to ensure that the prices theyprovide meet the specified criteria. Such field officers have been used successfully in other countries,particularly the USA and France, and it is planned to increase their use in this country as resources permitover the next few years.

Published sources

2.14 A few price quotations are obtained from published sources rather than direct from companies.Examples are prices for imported metals, which are obtained from the London Metal Exchange and for meatwhich come from the Meat and Livestock Commission.

3. Calculation of indices

Price relatives3.1 The next stage after collecting prices for a specific good from companies is to derive a price relative,which is the pure price for an item divided by its price in a base year, currently 1995. Algebraically, the pricerelative at time t is equivalent to The price relative in general follows the same

movements as the price of the item but allowance is made for changes in specification. Around 2,400specification changes were undertaken in the home PPI during 1996.

Laspeyres indices

3.2 Producer price indices are base-weighted (Laspeyres) indices - that is to say they are weightedaccording to the sales (for the output indices) or purchases (for the input indices) in the base year, currently1995. The simplest form of a Laspeyres index is:

where Q and P are the quantities and prices respectively of products - the subscript b denotes ‘in the baseperiod’ and the subscript t denotes ‘in the current period’. The base year is updated every five years, so that1995 = 100 PPIs were published for the first time in October 1998. Until recently, the base year underlying

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the PPI was actually one year earlier than the reference year, e.g. the PPI for 1985=100 was based onweights relating to 1984.

However, the base year and reference year have coincided from 1995 when the indices based on 1990=100were reclassified from the 1980 SIC onto the 1992 SIC.

Gross and net sector

3.3 PPIs are measured on two different bases - gross and net of inter-sector sales. As an example of theconcepts, the motor industry is comprised of many companies supplying parts to a few car manufacturerswho then produce the final product for sale to the customer. The gross sector output of Division 34 (motorvehicles, trailers and semi-trailers) would include both the sales of the parts and the sale of the finished cars.

The net sector output of Division 34 would measure only the finished product and exclude the interveningstages. All sales of capital goods are regarded as final products, and so are not netted out.

3.4 Most countries calculate PPIs on a gross basis, and the UK supplies PPIs on this basis to EUROSTAT.However, the high-level output price indices given prominence in the First Release are on a net basis. Theargument for the latter presentation is that this is the measure which best reflects manufacturing inflation onthe rest of the economy.

Since inflation affecting the output prices of intermediate goods will implicitly be factored into the outputprices of finished products, the gross sector approach can be seen as duplicating the contribution of themanufacture of intermediate goods. Gross sector indices, however, also contain valuable information, andare used to deflate the total turnover of industries, which by definition are on a gross basis. Apart from thehighest-level indices in the First Release and Tables 1 and 2 of Business Monitor MM22, the rest of theindices published since October 1998 have been on a gross sector basis.

Level of detail collected

3.5 Contributors are initially asked to select a representative quote at the 6-digit SIC(92) level. PPIs arecalculated at the 6-digit SIC (92) level and are grossed to the 4-digit class and higher levels. Items arenumbered within the 6-digit heading they are recorded, so that for example a washing machine would comewithin SIC (92) code 297113 with the ten-digit code of the form 2971130001. An example of a typical familytree is shown at Annex F.

Export price indices

3.6 EPIs are collected at the 6-digit Combined Nomenclature (CN) level published annually by HM Customsand Excise. This is also known as the Harmonised System (HS). For publication purposes and for deflationin the national accounts, the indices are aggregated to a three-digit CN level. For the purposes of deflatingturnover for export, EPIs are converted to SIC(92) by the Balance of Payments branch of ONS, who forwardthem on for deflation of the export component of the Index of Production.

Import price indices

3.7 IPIs are collected using the 6-digit CN, but published according to the Standard International TradeClassification (SITC). The detailed relationship between CN and SITC is shown in Guide to the classificationfor Overseas trade Statistics (Business Monitor MA21) published annually by HM Customs and Excise.

Reconstitution of indices

A reconstitution of an index occurs when an item is to be deleted or added to an index. This is distinct from aspecification change, which is described in Chapter 3, where a contributor changes the specification of anitem for which prices are supplied, but the weights of the item are unchanged. In a 'recon', the weights of anitem are changed, together with other changes to ensure weights continue to add up to 100 per cent. Amultiplication factor is applied to ensure that the value of the reconstituted index four months prior to themost recent calculated month are unchanged. (The revisions policy is described in Section 9.6).

Derivation of weights

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The PPI is at present re-weighted every five years. The most recent results were first published in October1998 with 1995=100. (The previous rebasing took place in 1993 onto 1990 = 100).

The weights used in the PPI system have two main sources:

PRODCOM

3.10 The value of sales in the base year (currently 1995) is extracted from the PRODCOM enquiry (forearlier base years, the Quarterly Sales Inquiry and Annual Sales Inquiry were used). PRODCOM, anacronym for Products of the European Community, collects data on sales from some 25,000 contributorsannually under a EUROSTAT directive. An attempt is made to exclude the value of exports (recorded in theOverseas Trade Statistics) from the weight at index level. However, due to the lack of data, total salesincluding exports are used to calculate eachcontributor’s weight at item level. To reduce variability at index level, sales from two years (1994 and 1995)are used to derive weights. A sample table showing the broad methodology is attached at Annex G.

3.11 It is important to note that the weights within the PPI are product-based, while the turnover figuresunderlying the Index of Production (IOP) are based on the main industrial products of particular companies.For IOP purposes, adjustments are made to the PPIs to allow for this difference in coverage and also thefact that PPIs relate to time of order while IOP relate to time of delivery.

Purchasing data

3.12 Data on manufacturing companies’ purchases of materials and fuel were obtained from quinquennialPurchases Inquiries, until recently. The last of these was collected in respect of 1989. To minimisecontributors’ costs, information on purchases is now collected as part of the Annual Business Inquiry (ABI).Particular industries are targeted on a rotating basis so that all industries are covered in a five-year period.

Input-Output Tables

3.13 Input indices are calculated from ONS’s Input-Output Tables, which use ABI and PRODCOM data assources. As a result, input indices shown in Table 3 of Business Monitor MM22 are calculated no lower thanInput-Output Group level. To derive weights for the high-level net sector indices, it is necessary to excludetransactions between industrial groupings. These are also derived from the Input-Output tables. Amethodological manual explaining these tables was published in 1997 (ONS (1997b)).

Import price indices

3.14 A contributor's weight in the import price index system is derived from the value of a company's importsin particular 6-digit CN tariff headings as obtained directly from the company. Weights at tariff code headingand above are derived from the total imports recorded in the Customs and Excise Returns in the base year.A sample is shown at Annex H.

Export price indices

3.15 A contributor's weight in the export price index system is derived from the value of the company'sexports at a six-digit CN heading for EU and non-EU destinations separately. This is in general taken fromthe Customs and Excise returns in the base year confirmed by the company if necessary. Weights for EPIsabove 6-digit headings are taken from the Overseas Trade Statistics for the base year. A sample table isshown at Annex I.

Seasonal adjustment

3.16 To assist economic analysis, four high-level PPIs are published in seasonally adjusted (as well asunadjusted) form. On the output side, these are the indices for all manufacturing excluding excise duties, andmanufacturing excluding the food, beverages, tobacco and petroleum industries. (The all manufacturingindex including excise duties is regarded as too susceptible for Budget changes to be seasonally adjusted.)On the input side, the indices for all manufacturing and manufacturing excluding food, beverages, tobaccoand petroleum industries are seasonally adjusted to take account of volatile seasonal movements, especiallyin electricity and food input prices.

The US Bureau of the Census seasonal adjustment package (currently version X-11 ARIMA furtherdeveloped by Statistics Canada) is used. Once a year, full results are taken on board for the most recent

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three months, but otherwise only the most recent two months figures and the month a year before thecurrent month are revised.

4. Sample Recruitment

Home PPIs

4.1 The sampling frame of companies for domestic PPIs is the production survey in the base year at the timeat which recruitment takes place. For 1990, it was the Quarterly and Annual Sales Inquiries (QSI/ASI) while ithas been the PRODCOM enquiry for 1995, which will continue in future base years. The recruitment form isat Annex C - a telephone warning exercise is undertaken to ensure that potential contributors meet thenecessary criteria.

4.2 Until recently, sampling has been on a cut-off basis - so that only the largest firms in each industry areselected for new recruitment, though in the past, when recruitment was on a voluntary basis some smallfirms were selected, some of whom are still in the sample. The contributor coverage at the all manufacturinglevel amounts to some 44 per cent of production. Chapter 5 describes the proposed new recruitmentprocedure using sampling stratified by sales.

Import price indices

4.3 Importers of raw materials and semi-manufactures are recruited to the IPI panel by selection of thelargest importers in specific headings recorded on Customs and Excise returns. More details of therecruitment procedures used for the new imported capital goods enquiry are described in Chapter 10.

Export price indices

4.4 Exporters are recruited to EPIs by selection of the largest exporters in specific 6-digit CN (CommonNomenclature) headings). So whilst agents can be recruited for the IPIs, they are not recruited for the EPIs;only exporters who are also manufacturers are included in the panel.

Prices supplied by other government departments

4.5 Other government departments provide indices for a few industries, as follows:

Department of Trade and Industry (DTI) provides indices for energy industries, including electricity, gasand petroleum, based on DTI’s monthly surveys to companies in those industries.

The Ministry of Agriculture, Fisheries and Food (MAFF) provides monthly prices on many of the outputsfrom UK agriculture purchased by UK manufacturing industry (which includes slaughterhouses). Theseprices are either taken from MAFF surveys (milk, fish, Agricultural Fruit and Vegetable Market Reports) orfrom the Meat and Livestock Commission, the Home-Grown Cereals Authority or the National Farmers Union(poultry broilers).

The Department of the Environment, Transport and the Regions calculates price indices for output ofconstruction. These are included within Table 18.7 of the Monthly Digest of Statistics, and in BusinessMonitor MM17 (Price Index numbers for Current Cost Accounting).

Trade associations

4.6 In the past, when the PPI was a voluntary survey, data for certain industries, such as brewing, wereprovided by trade associations. In recent years, the trend has been to move away from such quotes and torecruit data directly from companies. Very few quotes are now collected from trade associations.

New price quotes

4.7 The base price for an item is the price in the base year, currently 1995. If a new item is recruited after thebase year, a notional base price is set so that the initial price relative for the item is calculated to be thesame as its parent index. For instance, suppose a new manufacturer of washing machine is recruited inJanuary 1999. If the value of the item’s first stage parent index ‘cloth washing and drying machines’ -2971130000 under SIC (92) -stands at 120.0 at that time, and the price of the washing machine is £300,then the base price will be assumed to have been £250 in 1995, so that a price relative of (300/250)*100

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=120.0 in January 1999 is calculated - the same as its parent index. From that point on the price relatives forthe new item will be calculated relative to a notional base price for that item of £250 in 1995.

5. New sampling scheme for home PPIs

5.1 The methodology used to calculate the PPI has been reviewed and between 1999 and 2000 a newsample design is being introduced. Once this design has been fully phased in a new estimator will beintroduced. This will require an extended parallel run and is not likely to be introduced until late 2001.

5.2 The main elements of the new sampling scheme are:

• sampling from Prodcom;• using an optimal allocation; and• sample rotation.

Each of these are explained in the following sections.

Sampling from Prodcom

5.3 The new PPI sample will be chosen from those companies selected for Prodcom. This will ensure thatthe most up-to-date information for products and sales will be available for the sample. The sampling unitsfor the PPI sample are contributor product pairs, which are created by matching contributors to the productsthey produce. For instance if a Prodcom contributor made five products then five contributor-product-pairswould be created.

Optimal allocation

5.4 To ensure that the PPI sample gives the best results possible within its limit of 9,000 price quotes amonth an optimal allocation has been calculated using data from 1996 Prodcom. The objectives incalculating the allocation of price quotes between six digits were:

• minimising the sampling error of the all manufacturing index;• a maximum of 9,000 price quotes in total;• providing the highest quality four digit indices possible;• each six digit index to have at least three contributor product pairs;• each four digit index to have at least five contributor product pairs;• broadly the same resources should be needed for monthly calculation of the PPI.

5.5 The allocation calculations were statistically complex. In very simple terms the allocation of price quotesfor a stratum within a six digit was related to:

• the squared value of sales;• the number of contributor product pairs; and• the variance of the prices for the product (assuming that the present price indices were themselves theoutcome of a random sample).

The higher the relative value of any of these, then the higher the allocation. To minimise the sampling errorfor the overall index, each contributor provides only one price quote per product. The only exception to this iswhere the optimal allocation was greater than the number of contributor product pairs available from theProdcom sample. In these instances contributors were asked to provide two or three price quotes for aproduct (the maximum is three price quotes per product per contributor).

Effect of new sample

5.6 Using the optimal allocation to select a sample from the contributors to the 1996 Prodcom surveyshowed two main effects on the sample. The first was that it increased the number of contributors from 3,700to just under 7,000 but with the same total of 9,000 price quotes. As a consequence, more of the contributorswere providing fewer price quotes. 70 per cent of the new sample provide just one price quote in totalcompared to 38 per cent of the present sample.

5.7 The sample has also been re-balanced to better reflect current production. The total number of pricequotes for most products has remained fairly stable, but there are a few indices that have gained or lost a

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large number of price quotes. These include a large decrease in price quotes for navigation instruments andlarge gains for computers, motor vehicles and aircraft. Comparing the sample selected from 1996 Prodcomwith the current panel showed that out of the present 9,000 price quotes from around 3,700 contributors,2,000 price quotes were retained (from around 1,500 contributors).

Phasing in the new sample

5.8 The 7,000 new price quotes to be recruited to the PPI sample are too many to obtain in one exercise.Recruitment of new price quotes will therefore be done in three ‘waves’, each comprising of a set of fourdigits:

• the first wave requires about 3,000 new price quotes to be recruited between June and December 1998.The new quotes will be run in parallel with the current sample from February 1999 for a few months duringwhich time the PPI will be published using the current sample. Once the impact of the new sample has beenassessed it will be linked into the PPI. The length of time the parallel run can be carried out may be limitedby the resources available;

• the second wave of 1,000 new price quotes will be recruited between January and June 1999, and will belinked into the PPI indices after July 1999, depending on the results of the parallel run in the first wave. Thiswave will be selected from 1997 Prodcom;• the third wave of 3,000 new price quotes will be recruited between June and December 1999, and will belinked into the PPI indices after February 2000, depending on the results of the parallel run in the first wave.This wave will probably be selected from 1997 Prodcom, although there is a chance that 1998 Prodcommight be used if the timing of Prodcom results and PPI selection can be brought closer together.

It is important to note that the updating of the sample will have no impact on back data.

Sample rotation

5.9 The proposed method of rotation for the PPI is to select the sample afresh from each year’s Prodcomsample. Contributors who have been dropped from the Prodcom sample will no longer be available for thePPI, but their replacements will be available. Selecting a new sample each year will retain a large proportionof the contributor product pairs in the PPI sample, but will allow rotation for the smaller contributors.

It is proposed to introduce rotation for the PPI once the new sample has been fully introduced (i.e. firstrotation recruitment will take place during June to December 2000). The main benefits of rotation for the PPIare that it will:

• pick up new products and new contributors;• pick up existing companies making a product for the first time;• update company structures once a year only, and provide sales figures if structures have changed;• fill in gaps in the sample caused by contributors dropping out; and spread the burden of completing formsbetween smaller contributors.

For a more detailed account of the planned changes see Economic Trends December 1998, (Freeman &Cope).

6. Processing and data validation

6.1 Contributors return price movements by means of a pre-printed form containing the most recent detailsprovided to the ONS - a current blank form is attached at Annex D. These are sent to contributors at thebeginning of each month. They return their latest prices, and may provide future prices if they know theposition for the three months ahead. The form asks contributors to check if the specifications are still up-to-date and representative and to amend accordingly. Forms for companies in Northern Ireland are despatchedvia the Department of Economic Development in Belfast.

Data Validation

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6.2 There are two tests which staff use to check price movements on the home PPI with contributors:

Monthly movements outside the range -2.5 to +5 per cent. (These ranges are kept under reviews and maychange in the future). These are known as ‘dubious’ price movements and are only input after checking withthe contributors. Any information given by the contributor is included on the computer system. For the morevolatile export and import price indices wider gates of -7.5 to +7.5 per cent are used.

Monthly movements outside the range -25 to +25 per cent. These are known as ‘incredible’ pricemovements. These are also queried with contributors. Unlike ‘dubious’ price movements, these must bespecifically confirmed on the computer system with an explanation - otherwise they will be rejected.

6.3 As well as these checks before returns are input, there are also the following checks at later stages.Indices which move by more than 5 per cent (7.5 per cent in the case of export and import indices) arehighlighted in prints following the two monthly calculation runs (one known as the 'pre-calc' for internalchecking only and the 'main calc' which is published). Reasons for such movements must be shown on theprintouts and circulated to internal users of the data. 'Too stable' letters are sent to contributors whose pricesare recorded as not having moved for a set period, currently around eighteen months.

Data collection by telephone

6.4 Telephone Data Entry (TDE) is a means by which contributors return prices by inputting prices via theirtelephones. This was pilot tested largely successfully with service sector prices and was extended to themain PPI during 1997 and 1998. A description of the questions asked is attached at Annex X.

Imputation

6.5 The PPI computer programs impute for non-response in the most recent few months. The rules for thehome PPI are:

• if response in the lowest level (first stage) index is over 50 per cent, the computer imputes based on asimple average of the observed movements in the received returns within the relevant sub-category• if response in the class is under 50 per cent, the computer imputes based on the simple average ofmovements at division level.

Imputation for EPI and IPI are similar, though if response at the first stage is below 50 per cent, imputation isbased on movements for EC exports, non-EC exports or total imports as appropriate.

Treasury targets

6.6 Targets are agreed with HM Treasury for response rates and revisions to ONS’s key economic statistics.The PPI is subject to two Treasury targets: • response in the all manufacturing output index at the first timeof publication should exceed 82 per cent, with response weighted according to sales, and • the revision inthe estimate of the year to year all manufacturing output price index should not exceed 0.125 per centbetween time of first publication and the first 'firm' estimate published two months later.

Allowances for quality changes

6.7 Care must be taken when a the specification of an item changes to ensure that only the 'pure' pricechange is recorded as such for PPI purposes. As well as changes of good, specification changes take placefor alterations in terms of terms or units of sale.

6.8 There are three types of specification changes in the PPI system:

W specification changes

A 'W' specification assumes that the change in price is due entirely to the change in specification, whichmeans that the price relative is left unchanged at the time of the change in the model. In the case of awashing machine, suppose that in September 1998 the company ceases production of the original model(Model A say) which used to cost £375 and introduce a new model (Model B) costing £450.

If the company says the price rise is due entirely to the change in specification, then the price relative isunchanged, as follows:

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Example of 'W' specification changeModel A Model BPrice Price relative Price Price relativeAugust 98 £375 150.0September 98 £475 150.0

'X' specification changesAn 'X' specification change assumes a notional price change is due partly due to a change in specificationbut is partly a genuine price change. For instance, the washing machine manufacturer may introduce a newmodel at the time of a general 10 per cent price rise in its products. In such a case an 'X' specificationchange would say that 10 per cent of the notional price rise in Model B compared with Model A was due to aprice rise while the remainder was due to the change in specification.

Example of 'X' specification changeModel A Model BPrice Price relative Price Price relativeAugust 98 £375 150.0September 98 £475 165.0.15

'Z' specification changeIn the case of the change in specification between Model 'A' and Model 'B' being purely cosmetic, so thatthere is no fundamental change in the product being sold, a 'Z' specification change would be imposed. Thiswould imply that the whole of the notional price change is passed through as a 'genuine' price increase asfollows:

Example of 'Z' specification changeModel A Model BPrice Price relative Price Price relativeAugust 98 £375 150.0September 98 £475 190.0

The attached flow-chart (Annex E) summarises the processes involved in deciding which specification isappropriate. In the case of export price indices a change of country of destination is treated as an additionalpossible specification change.

7. Publication of results

First Releases

7.1 The earliest publication of the Producer Price Indices is in the ONS’s First Release for PPIs. This isnormally released on the second working Monday of the month. The Release contains indices at division,sub-section and all manufacturing levels. In order to exclude the more volatile industries as well as thoseaffected by excise duties, input and output series for manufacturing industries excluding the food, beverages,tobacco and petroleum industries are published. A brief commentary is provided on the headline figures. Acopy of the PPI First Release can be obtained by dialling 0336 416042 on a suitable fax machine, usingpolling mode.

Business Monitors7.2 More detailed indices are published in three monthly Business Monitors:

MM22 - Producer Prices IndicesThis currently contains the following tables (Apart from the highest level indices in Tables 1 and 2, all indicesare on a gross sector basis):

Tables 1 and 2 Input and output PPIs at division level and above. Until October 1998, Tables 1A and 2Acontained equivalent data on the SIC(80) classification.

Table 3 Input PPIs by input-output groups

Table 4 Output PPIs at class level and below

Table 5 Import price indices

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Table 6 Export price indices

Table 7 Corporate service sector price indices

MM19 - Aerospace and Electronics cost indicesThis shows total cost indices (including materials and fuel and labour costs) for the following four SIC(92)classes:

2960 Weapons and ammunition

3210 Electronic valves and tubes and other electronic components

3320 Instruments and appliances for measuring, checking, testing, navigating and other purposes,except industrial process control equipment

3530 Aircraft and spacecraft. This Monitor is widely used for contracts in the defence andaerospace industries.

MM 17 - PINCCA- Price Indices for Current Cost AccountingThis was first published in 1976 following a recommendation of the Sandilands Committee. Although currentcost accounting is no longer as widely used as in the 1970s and 1980s PINCCA still sells around 400 copiesa month. It contains the following tables:

Table 1 Price indices for plant and machinery bought as fixed assets by specific industries. Deflatorsare calculated for each industry using weighted combinations of appropriate PPIs andadjusted for the movement in import prices.

Table 2 Price indices for stocks held by specific industries. Deflators are calculated for each industryusing appropriate PPIs lagged by the stock holding period in that industry. Further details ofthe calculations involved in the indices in Table 1 and 2 are available on request.

Table 3 Price indices for road motor vehicles

Table 4 Price indices for specific types of asset

Table 5 Price indices for buildings and works

Table 6 Index of retail prices

Monthly Digest of Statistics Table 18.7 contains most of the indices published in the First ReleaseAnnual Abstract of Statistics Annual PPI data are shown in Section 18 of the Annual Abstract.

The Department of the Environment, Transport and the Regions publishes a wide range of price indices in‘Price Adjustment Formulae for Construction Contracts; Monthly Bulletin of Indices’. Many of theseare based on PPIs.

PPIs are analysed in the Bank of England Inflation Bulletin, including a table considering the whole range ofmanufacturers' input costs including the input PPI and labour costs.

Electronic release of data

7.3 Information is available from the NS Internet - address http://www.statistics.gov.uk/

Data coverage

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7.4 ONS's policy is to publish indices that meet our confidentiality criteria for publication (see paragraph9.10). Indices where contributor coverage is below 30 per cent are classified as 'B', indicating a lower level ofreliability. The criteria for IPIs are that indices with product coverage below 70 per cent are classified as ‘B’.Since October 1998, indices with relatively few quotes have been classified as ‘F’, indicating that they shouldnot be relied on for long-term contracts.

Revisions policy

7.5 The policy is to show significant revisions, but to suppress minor changes to avoid unnecessaryinconvenience to users of the PPI. Indices for the most recent two months are shown as provisional and canbe changed as later data are received the following month. Indices published for the third month are madefirm as long as response is 95 per cent or more. Indices are always made firm after five months. Once anindex is made firm it is only changed if there is a revision of 0.2 or more. Only the most recent five monthsindices are recalculated normally but earlier data will be revised if the revision in the first stage index is over1 per cent (if published) or 5 per cent (if not published). Higher level indices are only changed if the revisionis 0.2 per cent or more.

Linking between base years

7.6 The general policy for linking PPIs between different base years is as follows:

• to link earlier data onto the present base year, users may either link onto the earliest month published onthe present base year - which is January 1991 for the 1995=100 database, or follow the national accountspractice of linking on at January 1994.

• to link later data onto an earlier base year - link later data onto the latest month published as firm - say July1998 for the 1990 = 100 database. Examples are shown in Annex J.

Confidentiality

7.8 Under the Statistics of Trade Act 1947, criminal sanctions are in place to prevent the unauthorisedrelease of company data by ONS staff. Depending on the circumstances either the Office or individualmembers of staff would be liable for fines and/or imprisonment for unauthorised release. In addition, becauseof the confidentiality of the data, company price information is not released outside the division responsible,apart from direct line managers.7.9 An index is only published if it is felt it would not disclose company information either to a member of thepublic or another company in the industry, though confidential indices can be used by other parts of theGovernment Statistical Service for national accounts purposes or for the calculation of other inflationmeasures as long as the publication of these other outputs is at a sufficiently aggregated level not to disclosethe levels of these confidential indices.

Ad hoc indices

7.10 ONS offers the facility to produce ad hoc indices to customers specification. For instance, an oilcompany may supply the weighting details of the various components that go into making an oil rig. For afee, the ONS will calculate an index with monthly updates. Details are available from the PPI Section on01633 812106.

8. Future developments

Chain-linking

8.1 Chain-linking is an alternative method of rebasing in which weights are updated on an annual basisrather than five-yearly at present, though for convenience the reference year is not normally changed. Thismethod is currently used in the calculation of the Retail Price Index. Experiments are being undertaken tosee if this would be a practicable option to replace the next five-yearly PPI rebasing scheduled for 2003.

Imports of capital goods

8.2 The recruitment of prices of imported capital goods started in 1997 with the aim of completing allcategories of such goods over the following three or four years.Imports of finished intermediate goods

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8.4 A study undertaken on the then CSO’s behalf by Oulton of the National Institute of Economic and SocialResearch recommended that prices of finished intermediate goods should be collected in a similar way toraw materials and semi-manufactures i.e. those within SITC divisions 00 to 68). At present such imports areproxied by home PPIs and are netted out in deriving the high-level net sector input indices. The conclusionswere that the significance of finished intermediate imports, such as car parts, has been steadily increasingand their omission from the higher level input indices could not be justified. The ONS has accepted thisreport and will start to collect prices of these in 1999.