Producer Price Index Manual: Theory and Practice ... - METAC

Producer Price Index Manual
nity to introduce new products, new samples, new
data sources, new compilation practices, new elementary
aggregates, new higher-level indices, or
new classifications. These tasks are often undertaken
simultaneously at the time of reweighting to
minimize overall disruption to the time series and
any resulting inconvenience to users of the indices.
9.109 In many countries reweighting and chaining
is carried out about every five years but some
countries introduce new weights each year. However,
chained indices do not have to be linked annually,
and the linking may be done less frequently.
The real issue is not whether to chain, but how frequently
to chain. Reweighting is inevitable sooner
or later, as the same weights cannot continue to be
used forever. Whatever the time frame, statistical
offices have to address the issue of chain linking
sooner or later. It is an inevitable and major task for
index compilers.
C.7.1 Frequency of reweighting
9.110 It is reasonable to continue to use the same
set of elementary aggregate weights as long as production
patterns at the elementary aggregate level
remain fairly stable. However, over time purchasers
will tend to move away from products whose prices
have increased relatively so that, in general, movements
in prices and quantities tend to be inversely
related. This kind of substitution behavior implies
that a Lowe index based on the fixed basket of an
earlier period will tend to have an upward bias
compared with a basket index using up-to-date
weights.
9.111 Another reason why purchasing patterns
change is that new products are continually being
introduced on the market while others drop out.
Over the longer term, purchasing patterns are also
influenced by several other factors. These include
rising incomes and standards of living, demographic
changes in the structure of the population,
changes in technology, and changes in tastes and
preferences.
9.112 There is wide consensus that regular updating
of weights—at least every five years, and more
often if there is evidence of rapid changes in production
patterns—is a sensible and necessary practice.
However, the question of how often to change
the weights and chain link the index is not straightforward,
because frequent linking can also have
some disadvantages. It can be costly to obtain new
weights, especially if they require more frequent establishment
surveys. On the other hand, annual
chaining has the advantage that changes such as the
inclusion of new goods can be introduced on a
regular basis, although every index needs some ongoing
maintenance, whether annually chained or
not.
9.113 Purchasers of certain types of products are
strongly influenced by short-term fluctuations in the
economy. For example, purchases of cars, major
durables, expensive luxuries, etcetera, may change
drastically from year to year. In such cases, it may
be preferable to base the weight on an average of
two or more years’ revenue.
C.7.2 The calculation of a chained index
9.114 Assume that a series of fixed weight
Young indices have been calculated with period 0
as the price reference period, and that in a subsequent
period, k, a new set of weights has to be introduced
in the index. (The new set of weights may,
or may not, have been price updated from the new
weight reference period to period k.) A chained index
is then calculated as
(9.15)
I = I ⋅Σw ⋅I ⋅ I
0: t 0: k k k: t 1 t−1:
t
i i i
0: k k k:
t
= I ⋅Σwi
⋅Ii
.
0: k k:
t
= I ⋅I
There are several important features of a chained
index.
The chained index formula allows weights to be
updated and facilitates the introduction of new
products and subindices and removal of obsolete
ones.
• To link the old and the new series, an overlapping
period (k) is needed in which the index has
to be calculated using both the old and the new
set of weights.
• A chained index may have two or more links.
Between each link period, the index may be
calculated as a fixed weight index using equation
(9.10) or any other index formula. The link
period may be a month or a year, provided the
weights and indices refer to the same period.
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