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

Producer Price Index Manual
J. Seasonal Products
1.168 As explained in Chapter 22, the existence
of seasonal products poses some intractable problems
and serious challenges for PPI compilers and
users. Seasonal products are products that are either:
• Not available during certain seasons of the
year, or
• Are available throughout but their prices or
quantities are subject to regular fluctuations
that are synchronized with the season or time of
the year.
1.169 There are two main sources of seasonal
fluctuations: the climate and custom. Month-tomonth
movements in a PPI may sometimes be so
dominated by seasonal influences that it is difficult
to discern the underlying trends in prices. Conventional
seasonal adjustment programs may be applied,
but these may not always be satisfactory.
However, the problem is not confined to interpreting
movements in the PPI; seasonality creates serious
problems for the compilation of a PPI when
some of the products in the basket regularly disappear
and reappear, thereby breaking the continuity
of the price series from which the PPI is built up.
There is no panacea for seasonality. A consensus on
what is best practice in this area has not yet been
formed. Chapter 22 examines a number of different
ways in which the problems may be tackled using
an artificial data set to illustrate the consequences
of using different methods.
1.170 One possibility is to exclude seasonal products
from the index, but this may be an unacceptable
reduction in the scope of the index, since seasonal
products can account for a significant proportion
of total household consumption. Assuming
seasonal products are retained, one solution is to
switch the focus from month-to-month movements
in the index to changes between the same month in
successive years. In some countries, it is common
for the media and other users, such as central banks,
to focus on the annual rate of inflation between the
most recent month and the same month in the previous
year. This year-over-year figure is much easier
to interpret than month-to-month changes, which
can be somewhat volatile, even in the absence of
seasonal fluctuations.
1.171 This approach is extended in Chapter 22 to
the concept of a rolling year-on-year index that
compares the prices for the most recent 12 months
with the corresponding months in the price reference
year. The resulting rolling-year indices can be
regarded as seasonally adjusted price indices. They
are shown to work well using the artificial data set.
Such an index can be regarded as a measure of inflation
for a year that is centered around a month
that is six months earlier than the last month in the
rolling index. For some purposes, this time lag may
be disadvantageous, but in Section F of Chapter 22
it is shown that under certain conditions the current
month year-over-year monthly index, together with
the previous month’s year-over-year monthly index,
can successfully predict the rolling-year index that
is centered on the current month. Of course, rollingyear
indices and similar analytic constructs are not
intended to replace the monthly or quarterly PPI but
to provide supplementary information that can be
extremely useful to users. They can be published
alongside the official PPI.
1.172 Various methods of dealing with the breaks
in price series caused by the disappearance and reappearance
of seasonal products are examined in
Chapter 22. However, this remains an area in which
more research needs to be done.
K. Concepts, Scope, and Classifications
1.173 The purpose of Chapter 3 of the Manual is
to define and clarify a number of basic concepts
underlying a PPI and to explain the scope, or domain,
of the index: that is, the set of products and
economic activities that the index is intended to
cover. The chapter also discusses the various price
concepts and types of prices that are used in PPI
compilation and examines the structure of the classification
systems used in the PPI for products and
industries.
1.174 The general purpose of an index of producer
prices is to measure changes in the prices of
goods and services produced by businesses. However,
an operational definition of a PPI requires a
decision about, first, whether the index will cover
output prices or input prices (or both); second,
whether the index is meant to cover all production,
that is, all economic activities and/or products, or
just particular industries and/or product groups;
third, for the economic activities included, whether
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