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

Producer Price Index Manual
eral inflation, then statistical agencies should be
cautious about including products that show
strong seasonal fluctuations in prices in the
month-to-month index. 34 If seasonal products are
included in a month-to-month index that is meant
to indicate general inflation, then a seasonal adjustment
procedure should be used to remove these
strong seasonal fluctuations. Some simple types of
seasonal adjustment procedures will be considered
in Section K.
22.76 The rather poor performance of the
month-to-month indices listed in the last two tables
does not always occur in the context of seasonal
products. In the context of calculating import and
export price indices using quarterly data for the
United States, Alterman, Diewert, and Feenstra
(1999) found that maximum overlap month-tomonth
indices worked reasonably well. 35 However,
statistical agencies should check that their monthto-month
indices are at least approximately consistent
with the corresponding year-over-year indices.
22.77 The various Paasche and Fisher indices
computed in this section could be approximated by
indices that replaced all current period revenue
shares with the corresponding revenue shares from
the base year. These approximate Paasche and
Fisher indices will not be reproduced here because
they resemble their real counterparts and are themselves
subject to tremendous downward bias.
34 However, if the purpose of the index is to compare the
prices that producers actually receive in two consecutive
months, ignoring the possibility that the purchasers may regard
a seasonal good as being qualitatively different in the
two months, then the production of a month-to-month PPI
that has large seasonal fluctuations can be justified.
35 They checked the validity of their month-to-month indices
by cumulating them for four quarters and comparing
them to the corresponding year-over-year indices. They
found only relatively small differences. However, note that
irregular high frequency fluctuations will tend to be smaller
for quarters than for months. For this reason chained quarterly
indices can be expected to perform better than chained
monthly or weekly indices.
H. Annual Basket Indices with
Carryforward of Unavailable
Prices
22.78 Recall that the Lowe (1823) index defined
in earlier chapters had two reference periods: 36
• The vector of quantity weights; and
• The base-period prices.
The Lowe index for month m was defined by the
following equation:
0 m
(22.28) PLO
( p , p , q )
=
N
∑
n=
1
N
∑
n=
1
p q
m
n n
p q
0
n n
where p 0 ≡ [p 1 0 ,…,p N 0 ] is the price reference period
price vector, p m ≡ [p 1 m ,…,p N m ] is the current
month m price vector, and q ≡ [q 1 ,…,q N ] is the
weight reference year quantity vector. For the purposes
of this section, where the modified Turvey
data set is used to numerically illustrate the index,
the weight reference year will be 1970, and the resulting
reference year quantity vector turns out to
be:
(22.29) q ≡ [q 1 ,…,q 5 ]
= [53889, 12881, 9198, 5379, 68653].
The price reference period for the prices will be
December of 1970. For prices that are not available
in the current month, the last available price is
carried forward. The resulting Lowe index with
carryforward of missing prices using the modified
Turvey data set can be found in column 1 of Table
22.23.
22.79 Baldwin’s comments on this type of annual
basket (AB) index are worth quoting at
length:
For seasonal goods, the AB index is best considered
an index partially adjusted for seasonal
variation. It is based on annual quantities, which
do not reflect the seasonal fluctuations in the
36 In the context of seasonal price indices, this type of index
corresponds to Bean and Stine’s (1924, p. 31) Type A
index.
;
580