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

1. An Introduction to PPI Methodology
may be taken as a guide to the value of the quality
difference.
1.350 Increasingly, national statistical agencies
are researching and selectively implementing hedonic
regression techniques as a means of placing a
market value on different characteristics of a product—for
example, the value of an additional unit of
RAM on a personal computer. When the characteristics
of a particular product change, these techniques
enable its price to be adjusted to make it directly
comparable with that of the old model. Unfortunately,
hedonic techniques tend to be very
costly, involving extensive research and analysis
and the collection of large volumes of data.
Step 7. Calculating the index
1.351 Under Step 3, the two categories of indices
were described: lower-level and upper-level indices.
Having established the structure and weighting
pattern of the index, constructed a processing system
and established the regular price collection, the
first step in the routine production cycle is to aggregate
the input-edited prices to form the lower-level
indices. There is a range of micro-level index formulas
available for use, each being based on different
assumptions about the relative behavior of
prices and quantities in the economy (see Chapters
15 and 17).
1.352 The initially compiled lower-level indices
should be scrutinized for credibility in terms of the
latest period movement, the annual movement, and
the long-term trend. Output editing, involving comparisons
of price levels and movements between
different businesses, is an integral part of the credibility
checking. Reference to the type of supporting
information described under Step 5 will be valuable
for this analysis.
1.353 Despite the most rigorous collection processes,
there are often missing prices that need to be
imputed. Prices may be missing either because the
provider failed to report on time or because there
were no transactions in that product specification in
the relevant period. Imputation techniques include
applying the price movements of like products to
the previous period price observations. The like
products may either be reported by the same business
or by other businesses. Another approach is to
simply repeat the previous period prices, but this
approach should be used only if there is reasonable
certainty that the prices have not changed.
1.354 Once the price statistician is satisfied with
the lower-level index series, the series should be
aggregated to form the hierarchy of upper-level indices,
including the total measure. This aggregation
is undertaken using the classification structure and
weighting pattern, determined in Step 2, and an appropriate
index formula.
1.355 Extensive studies have concluded that the
theoretically optimal formulas for this purpose satisfy
a range of tests and economic conditions, and
as a class are known as superlative formulas (Chapter
15). A basic characteristic of such formulas is
that they employ weights based on volume data
from both the current period and the period of index
comparison. In practice, since the volume data from
the current period are not available at the time of
index construction, the use of a superlative formula
would necessitate the estimation of the current period
volume data in order for timely indices to be
produced. When the current period volumes subsequently
became available, the index numbers would
need to be recompiled using the actual volumes,
and the earlier index numbers revised. This ongoing
cycle of recompilation and revision of published index
numbers would create a high degree of uncertainty
among users (as explained under Step 8) and
is highly undesirable. Therefore, most national statistical
agencies compromise and use a baseweighted
formula such as Laspeyres.
1.356 The upper-level indices are aggregated
across industries, commodities, and/or stages at national
or regional level, as defined in Steps 2 and 3,
to produce the aggregates required for publication
(Step 8).
1.357 Finally, annual average index numbers and
the suite of publication and analytical tables should
be produced and the commentary on main features
prepared for publication (see Step 8). It is prudent
to apply broad credibility checks to the aggregates
before release. Are the results sensible in the context
of the prevailing economic conditions Can
they be explained
Step 8. Disseminating the indices
1.358 During the initial user consultation phase
described under Step 1, and the formulation of the
index classification structure under Step 2, broad
publication goals will have been formulated. It is
now time to refine and implement these goals,
probably involving further user contact.
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