Revision of the Producer Price Index (PPI)

The producer price index is going through a major revision and alteration these days. This revision covers several important areas within the index, which means that the users also will be affected.

The revision will be effective from the January index, published 9^th February 2001.

Improvement for the user

The revised index will imply more improvements for the users. The methods of computation are altered in several areas. Geometric mean is introduced in the micro level estimation, for technology products the hedonic method will be used for quality adjustments (inter alia computers), a chained Laspeyres formula is employed for aggregation etc. An annual updating of the weights will be introduced, and the industrial classification aligned with what is used for other short-term statistics covering oil and gas extraction, manufacturing, mining and quarrying and electricity, gas and steam supply.

A producer price index will be published the way it is done today, that is a price index indicating the price development in the Norwegian market and the export market as a whole. Such data will be made available at a relatively detailed industry level. The revised index will in addition publish indices indicating the domestic price development.

The revision means a break in the series

The producer price index will, due to the ongoing alteration, be based on some different principles and methods. The transition to a new index is evaluated as so important that it is accurate to refer to the alteration as a break in the series. However, earlier indices with 1977=100 and 1981=100 are chained to the new index so that the historical development for the period 1977-2000 is intact.

The official index including December 2000 with 1981=100 will be available at our web site. This series (1981=100) will, however, not be prolonged. The indices will, as today, be available with one decimal.

New official producer price index

From the January index 2001 a new, official index with reference year 2000=100 will apply. The new, official producer price index will be chained to the 1981=100 index, and it will be published with two decimals. The official index will not be revised after its publication due to the requirement of predicaments. For the period 1981-2000 the official producer price index will accordingly be an index with reference year 1981=100.

Commodity price index for the industrial sectors¹

In connection with a general improvement of price statistics considerable work is done to improve the basis of the data for the index - also covering the period 1995 to 2000. To make these improvements available for users, we will make a commodity price index for the industrial sectors¹ with reference year 2000=100. All series will be published with two decimals. This index may however be subject to revisions in later periods - revisions that also will affect published series. The commodity price index will consequently be less suitable for e.g. adjustments of contracts.

The producer price statistics will as previously be published on a monthly basis, and consist of three main categories of indices:

¹ Oil and gas extraction, manufacturing, mining and quarrying and electricity, gas and steam supply

A brief examination of changes due to the revision

In the following a brief examination of the main areas in the revision is done. The areas are:

• Classification
• Weights
• Method of calculation
• Questions

Classification

The index adopts the Standard Industrial Classification (SIC94), which is based on the NACE Rev. 1. For most of the users of short-term statistics presented at Statistics Norway this standard is already known. As a result more sub-indices are published, covering more industries.

The publishing will further include a decomposition of the producer price index into four main industrial groupings - intermediate goods, capital goods, consumer goods and energy goods. The consumer goods are in addition divided into durable consumer goods and non-durable consumer goods.

Main aggregates and their industrial codes

^* Standard of Industrial Classification (see NOS C182 for further details).

Weights

The foundation of weighting is, as before, the National Accounts' numbers for production and exports.

The index will introduce a yearly updating of the weights. In the calculations of detailed levels the weights will be based on the final National Accounts' figures. Based on the quarterly National Accounts' data the weights will be projected until the year in advance of the index year.

The change to a yearly updating of weights will mean that industries that normally have large variation in prices and/or the value of production from one year to another, for instance the oil and gas production may have larger variation in the contribution to the index calculations.

Methods of calculation

Geometric average: At micro levels we employ a geometric average. This is in accordance with international recommendations. Studies of methods used in calculation at micro levels have proven that a geometric mean is suitable for price statistics. The method is also evaluated as more robust when changes are monitored in the primary material.

Hedonic method: When buying e.g. IT products many purchasers observe that the nominal prices are relatively stable over time. At the same time they see that the product quality is considerably developed. In the producer price index and other price statistics it is the quality adjusted price development we want to measure. For this we have in the work with the index, in addition to other methods, adopted the hedonic method. The basis for this method is that the technical characteristics or other qualitative aspects of the product are closely related to the price. Using regression techniques based on price information and technical data allows for separating the price changes from the quality changes.

Firstly we will use this method for calculation of the price development of computers. Subsequently, we will adopt this method to other technology products with large quality changes.

Data from Foreign Trade: The Foreign Trade Statistics have a considerable material (value, volume etc.) associated with exports and imports of commodities. For some of these, e.g. raw material, the Foreign Trade price material is evaluated as a suitable indicator for measuring price developments.

In connection with the revision of the producer price index information from Foreign Trade is employed for some product areas. In other areas price information gathered directly for price statistics purposes (e.g. some spot prices) is used. In the future price material from Foreign Trade and other suitable price information will be considered and employed in coherence where relevant.

Chaining: The index will as before use a Laspeyres formula in aggregating above micro levels. The traditional formula with fixed weights and products will however be replaced by a chained index. This has to be viewed in context with the yearly updating of weights.

The change to a chained Laspeyres formula is connected to the fact that a traditional formula over time will complicate the updating of the product sample. This work will be considerably easier with a chained solution where changes are simply made in December in connection with the yearly revolving of the production system. This contributes to a faster introduction of new products. A chained solution combined with a yearly updating of weights make the measurement of the price development more correct, especially over time.