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

Producer Price Index Manual
solve the sale price problem, the most recent nonsale
price before the month of the base price is used
as the base price. To solve the price movement
problem created by the use of nonsale prices as base
price, the first six months of calculation are not
published, and the index is reset to begin calculation
in the seventh month. This sixth-month interval
is necessary because new indices are introduced
only every six months in the U.S. PPI program. Although
six months of pricing data are lost, the bias
is eliminated from the index. The base price problem
is related to the Laspeyres formula bias problem
in the sense that it is actually a weighting problem
that derives from the price movement of items
based at sale prices being overrepresented (having
too large of a weight) in the index.
10.175 The negative price problem derives from
the fact that some retail trade establishments, for
example, supermarkets, drug stores, and gasoline
stations, will, on occasion, sell individual products
at a loss. This is done to draw customers with the
expectation that they will purchase not only the
product being sold at a loss but also products with
positive margins. Since the index calculation system
used in the U.S. PPI program does not allow
negative or zero prices to be used, a procedure was
implemented that uses a Dutot index (the ratio of
average prices) to calculate price indices in the retail
trade industries. This procedure can be briefly
described as an unweighted summation of margin
prices for three relatively homogeneous products.
The monthly percentage change for these three
products is used in index calculation instead of the
price for a single product. The Dutot methodology
also decreases the variability of index movement
that is often a characteristic of margin priced indices.
10.176 The weighting problem is concerned with
the aggregation of margin and nonmargin goods.
Industry definitions in retail trade industries include
not only selling merchandise but also, in certain
cases, the manufacture and sale of products. Consider
a bakery that manufactures bread for resale or
in-store consumption and carries other prepackaged
bakery products for resale. Since all production is
given a chance of selection, prices for some of the
manufactured goods and some of the prepackaged
bakery goods for resale may be collected. The
prices for the manufactured goods are the retail
price, while the price of the prepackaged bakery
goods is the margin price. Combining retail prices
and margin prices in the same product category creates
item weighting problems. Suppose the bakery
sells two loaves, one manufactured on premise and
the other a prepackaged loaf bought from another
bakery. One might suppose that the selling of the
two loaves should have equal weighting. However,
the retail-priced loaf should have a larger weight
than the margin-priced loaf because the output associated
with the former is manufacturing and selling,
while with the latter it is just selling.
10.177 The easiest solution to this problem is to
create two properly weighted product categories
separating the margin priced goods from the nonmargin
priced goods. However, if budget allocations
are not large enough to support a separate
sampling of the two transaction types, an alternative
solution needs to be developed. Separate data on
manufactured and resold goods must be acquired
and used to derive or reapportion the sample unit
weight among transactions that are margin priced
versus those that are not. It should be noted that for
the United States, Canada, and Mexico, this problem
will disappear as the North American Industry
Classification System (NAICS) is fully implemented.
Under NAICS, all combined manufacturing
and selling transactions are classified in the
manufacturing sector and not in the retail trade sector.
10.178 A fundamental issue in pricing retail trade
industries is adjusting for changes in the quality of
the service, which is assumed to be dependent on a
store’s characteristics. If store characteristics
change, all items being priced from that location
have to be adjusted to account for changes in the
service, provided they are related to a change in
store characteristics. A retail store is considered to
be providing the same service activity when slight
modifications are made to the products being sold.
Major changes to products could require changes in
the retail service—different displays or different inventory
requirements.
10.179 Hedonic models should quantify the correlation
that exists between store margins and store
characteristics. Store characteristics include
• Total store area
• Selling area,
• Checkout scanners,
• Age of scanner software,
• Number of stock keeping units,
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