Exhibit 1. Continued—Final allocation, of Producer Price Index industries by stage of process

sIc Industry . SIC . Industry

Finished: processors (cont) 3914 Silverware, plated. ware and stainless-steel ware

ney 3931 |- Musical instruments
3825 Electrical measuring:and integrating instruments 3942, Dolls
3829 | Measuring and controlling devices, not elsewhere 3944 |. Games, toys, and children’s: vehicles, except dolls
classified and bicycles
3832 .|. Optical and analytical. instruments 3949. |. Sporting and athletic goods, n.e.c.
-| 3851 | Ophthalmic goods 3951° | Pens, mechanical pencils, and: parts
3873 | Watches, clocks, and watchcases 3952. | Lead pencils and art goods
< } 3961 Costume jewelry and costume novelties, except

3911 | Jewelry, precious, metal. precious metal

n.e.c. = not elsewhere classified.

mfpm = manufactured from purchased materials. .

2. The proportionate use of that commodity by the indus-
tries in the stage of process, multiplied by

3. The net input ratio for that commodity in that stage of
process. .

If one is willing to'assume that the industries within the
relevant stage of process consume all specific products
within a four-digit sic classification proportionately, the
total four-digit commodity index could be used directly in
calculating an input index. In many cases, that is a reason-
able assumption. While the pp! industry index system does
not currently contain indexes that.are explicitly “wherever

made,” the primary products commodity indexes published _
below the four-digit sic industry indexes in table 5 of Pro-

ducer Price Indexes cover the great majority of commodity
shipments, These indexes thus can be used in constructing
input indexes without substantially compromising coverage
in most cases.

In reviewing the input consumption patterns of stages of
process, it was discovered that the consumption of specific
products within a general commodity classification was
sometimes not proportionate. As an example,. within the
general classification of motor vehicles, automobiles are
more likely to go to personal consumption expenditures and
heavy trucks are more likely to. go to capital investment.
Because the potential for these types: of différentiations is

virtually endless, the Prt design adopted two guiding princi- ©

ples in looking below the four-digit sic commodity classifi-
cation structure:

© A breakout below the four-digit, sic level will occur

only when there is.clear evidence. of different usage

patterns and the. difference has substantial effect. The

effect judgment is subjective but, in general, the PPI

design attempted to avoid introducing index complex-

ity when it was unlikely to affect the published input
index.

; © Breakouts will be based ‘on objective data to the maxi-

mum possible extent. This required use of multiple

additional data’ sources, the most important of which

were motor vehicle consumption data from the Com-
merce Department’s Bureau of Economic Analysis and
petroleum consumption data from the Department of
Energy.

The final input indexes thus consist of sic-based commodity
indexes at the four-digit level, and occasionally lower levels
aggregated by net input weights on a 1982 value basis...
Input indexes are published for the stages of process be-
yond the crude category and for final demand. As in the case

“of the output indexes, a variety of subindexes are also pub-

lished separating durables and ‘nondurables and other signif-
icant product types. The’ input indexes appear as table 13 of
Producer Price Indexes , an example of which appears here
as table 5:

It should be-noted that the subdivisions-in 1 the input index
design are commodity classifications, which are somewhat
different than the industry cJassifications in the output index
design. For example, an industry. that, produces mostly

_ durable products but some nondurable: products will reside,

completely within durables on the output index structure. In
the input index structure, however, the durable products will
appear under durables and the nondurable products will
appear under nondurables.

Comparison with current indexes

The new industry-based stage of process system outlined.
above currently is being published along with the traditional
commodity-based stage of process structure which has been
the focus of ] Producer Ptice Index presentation and analysis.
The new index system initially cannot be seasonally ad-
justed because sufficient historical data do not yet exist to
allow accurate adjustment.

Clearly, ‘there are significant differences between the
current commodity-based stage of process system and the
new industry-based system. The most-obvious, of course, is
that the new industry model has four stages of process while
the commodity model has three: The most: profound con-
ceptual difference, however, is that the industry-based sys-
tem is ‘a transaction flow model of input/output indexes

15


MONTHLY LABOR REVIEW April 1988 © Stage of Process Price System for PPI

crude. producers. Input indexes also compensate: for what-
ever problems of backflow remain after forward flow is
maximized. The difference between the output index of one.
processing stage and the material input index to the next can
be evaluated specifically by comparing these indexes.in the
PPI system.

Categorization of industries

The ppI stage of process design began with the determina-
tion that there should be four stages of process:

© Crude producers

© Primary producers

¢ Semifinished producers
e Finished producers

This categorization reflects a considerable amount of experi-
ence with stage of process index problems. It particularly
reflects concern that the Intermediate Materials component
in the traditional three-stage PPI system is too broad and is
masking significant internal differences. In addition,
through the course of allocating industries. to processing
stages, the magnitude of internal flow was specifically eval-
uated, The relatively small.amount of internal flow achieved
indicates that a four-part division is appropriate.

The key set of data needed to allocate industries to proc-
essing stages is comprehensive information on the pattern of
inter-industry shipments. The basic. source of this informa-
tion is the Input/Output Tables of the United States pub-
lished by the U.S. Department of Commerce. The input/out-
put tables show all output of goods and services produced by
industry and show the goods and services each industry
consumes. Using an assumption that firms are indifferent as
to the industry of origin for the goods and services they buy,
these tables can. be recalculated into a matrix. of inter-
industry shipments. These data can then be used to rigor-
ously evaluate the flow characteristics of any given stage of
process allocation. This was done using the 1977 Input/
Output tables, which were the. most recent available. for
detailed (537-industry) input/output industry. definitions.

Because final demand is predefined and all of the other
processing stages are to be defined through the allocation
process, the first step. in-stage of process allocation is to
identify those input/output. industries shipping to final de-
mand. Those that ship exclusively to final demand must be
finished goods producers,. because they would have no
backflow, no internal flow, and only forward flow to final
demand. There are, however, many other industries that do.
not ship exclusively to.final demand.but ship a large percent-
age of their product to final demand. The question then
becomes, which of these industries should be allocated to
the group of finished goods producers?

To make that determination, a frequency distribution was.
constructed for all industries showing the proportion of their
net shipments that.go to final demand. Clearly, industries
shipping more than 95 percent of their output to final de-

mand should be classified’as finished goods producers and
the frequency diagram showed similar numbers of industries
‘shipping 75 to 85 percent and 86 to 95 percent of their output
to final demand, The number of industries in the intervals
shipping below 75 percent to final demand fell sharply,
however. Therefore, as a first cut, all industries that shipped
75 percent or more. of their output to final demand were
classified as finished producers.

This process was then repeated for earlier stages of proc-
ess. To determine the first cut for semifinished producers,
for example, a frequency distribution was prepared showing
shipments of unallocated industries.to final demand and to
industries. previously identified as finished. Through this
process, a breakpoint of 60 percent was identified, so that
semifinished producers were those industries which shipped
60 percent of their output to finished producers and final
demand but shipped less than 75 percent of their output to
final demand alone.

A forward breakpoint of 60 percent was also identified for
primary producers. Crude producers were the industries left
over after‘the other stages of process were defined:

The result of this: series of preliminary allocations was a
base stage of processing allocation which could then be
iteratively improved by analyzing the net forward flow con-
tribution of individual industries. The ‘specific mechanism
for this analysis was calculation of the net forward flow
effect for each industry if it were placed in each processing
stage with all other industry allocations remaining un-
changed, Optimally, an industry should be assigned to the
processing stage in which its net forward flow.contribution
is largest. .

The net forward flow effect for each individual-industry
was expressed as the following:

1, The sum of forward shipments of the industry and the
inputs received from prior stages of process, minus

2: The sum of backward shipments of the ‘industry and
the inputs received from forward stages of process.

Using this procedure, the allocations were iteratively im-
proved until further reassignments could not significantly
improve net forward flow. When the net forward flow statis-
tics between two stages of process were very close for an
individual industry, however, there was a preference for
placing the industry with other similar industries and to limit
problems with skips.

“Table 2. Percentages of producing industry output con-
sumed by stage of process, all industries
Consuming Industry
Producing z
Industry Crude | Primary | Semifnished | Finished | Final
WS 95 15.7 29.4
18 259 208 | 340
43 74 gas | 433
13 44 a1 | 933



Exhibit 1.. Continued—Final allocation of Producer Price Index industries by stage of process

sic Industry sic Industry
Primary processors (cont) 3297 | Nonclay refractories
2046 Wet corn milling 3299 Nonmetallic mineral products, n.e.c.
2075 Soybean oil mill products : *
2076| Vegetable oil mills, n.e.c. 3312. Blast furnaces and steel mili
3316 Cold finishing of steel shapes - mfpm
2AA1 |. Narrow fabric: mills 3317 | Steel pipe and tubes - mfpm
2269 Finished yarn, raw stock, braided goods a and 3321 Gray-inon foundries
narrow fabric, except knits and wool y a .
3322 Malleable iron foundries
2281 Spun yarn, except wool ; . 3304 Steel inves foundries
2282| Texturing, throwing, and winding mill products: 3325 Steel fc ie cs, nec.
2083 wank oes manmade fibers and silk 3351. | Rolling, drawing, and extruding of copper
2291 Felt goods, except woven felt and hats 3353 Aerio sheet, plate,, foil, and welded tube
2294) Provesoed texte waste 3354 | Aluminum extruded products
he a 3355 | Aluminum rolling and drawing, n.e.c.
2297| Nonwoven fabrics and.related products 3356 | Rolling, drawing, and ext g nonfer petal
2299 Textile goods, n.e.c. except ‘copper ‘and al atk TOUS J
7 . + ‘ 3361 Aluminum foundries
2421 Sawmills and planing mills a
2441| Nailed wood boxes and shook 3562 |. rs, bronze, and copper foundiies
2449| Wood containers, in.e.c. ceeds
2492 Particleboard
3423 | Hand and edge tools, n.e.c.
2499 Wood products, n.e.c. 3451 | Screw machine-products |
2621 | Paper mill products except building paper ae Bolts, amis, screws, nvets, and washers
2641 Paper coating and glazing 3463 | Nonferrous forgings
360 Dro caper and board 3469 | Metal stampings, n.e.c.
1 Foldi boi 3471 Metal plating and polishing
265 ing paperboard boxes 3479 | Metal coating and allied services
2652'|°. Setup paperboard boxes 3499 | Fabricated metal products, n.e.c.
2653) — Corrugated and solid fiber boxes » BEG
2654 Sani food container :
3658 | Fiber cons, drums and similar products 3544 | Special tools, dies, jigs, fixtures and industrial
2661} Building paper and building board mills asus ae ‘al asenbotias
2751 Commercial ting, | 3562 Ball and roller bearings
2752 Commercial ee {ithosraphic 3592 | Carburetors, pistons, piston rings, and valves
2754] Commercial printing, gravure 353 Machinesy except electrical, n.e.c.
2761 Manifold business forms 3055 [ Catbone ee sai ite
2822| — Synthetic rubber . ;
2851| Paints and allied products Semifinished processors
2891 Adhesives and sealants.
2895 Carbon black’ 0134 Trish potatoes
2899 Chemicals and chemical preparations, n.e.c. 0161 Vegetables
0171 Berry crops
2911| Petroleum refining 0172°| Grapes
3031 Reclaimed rubber. 0173 Tree nuts
3079 Miscellaneous plastic products rae Carus fruits Pon
3211 Flat glass ‘ 0176 Melons
3221 Glass. containers 0183 | Greenhouse and nursery products
3229| Pressed and blown glass, n-e.c. »
3231 Products of purchased glass 2011 | Meat packing plants
3241] Hydraulic cement ; 2018 | Poultry dressing, poultry and cee processing
3264| . Procelain electrical supplies 2023 | Condensed and evaporated mil
3291 Abrasive products 2026 Fluid milk
3292 Asbestos. products 2041 Flour and other grain mill nisl
3293| Gaskets, packing, and sealing devices 2044 |. Rice. milling

i


MONTHLY LABOR REVIEW April 1988 © Stage of Process Price System for PPI

indexes also are produced within each stage of process
which correspond to important economic characteristics.
For.example, separate subindexes are produced for foods

Processors, energy processors,’ nondurable goods proces-.

sors, and durable goods processors. The output indexes by
stage ‘of process will be published as table 12 in Producer
Price Indexes..An example of the output index system ap-
pears here as table 4.

Input indexes for processors

Construction of input indexes by stage of process is some-
what more complicated than construction of output indexes.
In the output indexes, all of an industry’s production is
assigned to one, and only one, stage of process. In the input
indexes, however, a single industry’s products may be con-
sumed at several processing stages. In addition, different

products within an industry’s product line may be consumed
by different stages of process. For example, gasoline: pro-
duced by the petroleum refining industry may be consumed
at all stages of process while jet fuel would be predomi-
nantly consumed by the processing stage that included air-
lines.

The input index design, therefore, has to specifically deal
with these two issues:

What proportion of a particular industry’s products is
consumed by a given stage of process?

What particular mix of those products is consumed by
that given stage of process?

The answer to the first question can be estimated from the
input/output tables. Because the input/output tables show
consumption of products by commodity category, the pro-

Table 4, Producer Price Indexes and percent changes for the net output of industry by stage of process
(June 1987=100)
Unadjusted Unadjusted percent changes.
Relative idee 12 ‘3 months ending— Senuery
Grouping! December” ming bad
987 | October May | August | November |’ February
‘19872 | “19682 | toaee | February | sog7 | “1967 | 1967 1968} February
too000 | 112 | 1018. | 1019 53 | 26] 22 03 07 oA
9132 | 983. | 1051 | 1080 @ | @} @ 88 81 28
5.438 93.3 103.2 108.8. 28.3 18.0 | -129 12.3 Wd 54
364 | 1009 | 1080 | 1067 146 | 29] 06 40 38 “2
993 54 +25 | 15] 33 -47 25 -06
42.814 104.6 108.0 108.5 @). @ ®) 32 28 05,
32003 | 1032 | 1057 | 1070 9: 20| 23 22 at 12
10.721 100.1 115.7 113.6 178 Kay 50 65 22 “18
tooo. | to14 | tos |. 1007 34 | 22 Ot
15578 | 984 98.4 @ @ 04
13684 | 977 977 09 | 54 09
1996 | 1007 1087 133 | 91] - -39
0940) 100.1 1013 27 | 12] 03 04
83482 | 1021 1011 ® | | @ 00
51.105, 102.0 99.1 25 20 45 00
gear7 | 1004 1044 52 |. a7] 44 00
190,000 jog 30 | 10} 00 13 07 -03
22.209 99.0 ® | @| @ 26 =18 -22
2919 946 -33 | -10 | -64 ws | -224 | +74
19380 995 19 | 28] -14 = 14 00
77701 1027 ® | @] ® 09 14 02
22.684 104.0 5A 09 07 14 23 06
55.017 1022 29 |. 06 | 04 08 14 oA
100,000 1019 24 | 05] 04 08 09 03
19.785, 101.0 26 12 09 05 1.0 02
1.953, 108.2 77 | 00}. 17 12 48 28
78.263 1020 ® | @| @ og 08 03
19.588 404.1 a7 | 05} 14 05 23 05
58.674 1013 14 | 02] 04 rr) 02 02
46413 | 983 53 @ | of @ -25 06
sase7’ | 1030 | 1073 | 1084 ® | | @ 35 o7
94,562 1017 101.7 101.5 @) @) @) 02 02
soe |] wir | i015 | 1013 ® @| @ 00 “02
4A ABA. 104.4 107.7 108.2 @) @) @) 28 05
21376 | 1022 925 ® | @}| -108 09
7a624 | 1012 | 1027 | ° 1030 ® | @| @ 18 03
63.046, 102.1 nag 104.2 @) @) @) 18 03
go2ts | 114 | tot 10241 ® | @}| @ 08 03
ei hi al ii it nity le ble oY ir Labs 2 All data are subject to revision 4 months after original pubication. Data are not seasonally
Statistics periodical Preducer Price are allocated to stages of process based adjusted.
on locust aipmont atoms rom he 1977 pope elonetign Not available,



- Percentages ‘producing Industry:
gamed by stage of past processor ope

~<Conauming industry

Ker crude | Primary | Santtiehed | rrihoa| Fe
shee demand

478} 88S P BR “46 185

WW 138 343 | 23.0 4.2
49 33° f 82 48 g°*

18]. 14, 15 83 | 893

Table 2 shows the flow characteristics of the final PPI
stage of process design. The percentages shown in the table
represent that part of the output of each row stage consumed
by each column stage. Using primary producers asan ‘exam-
ple, the flow pattern is as follows:'

© 7.5 percent of the output of primary Sroducers i is con-
sumed by crude producers. This is.a backflow. -

11.8 percent of the output of primary producers is con-
sumed by primary. producers. This is an internal flow.

© 80.7 percent of the output of primary producers is con- ©

sumed by forward stages of process (25.9 percent by
semifinished, plus 20.8 percent by. finished, plus 34.0
_. percent by final demand). This is forward flow. ..

The total flow statistics’ for the entire stage of process
structure ‘are: backflow, 5.01 percent; internal ‘flow,’ 7.86
percent; forward flow, 87.13. percent; and shipments to. the.
next forward’ stage of process; 57.30 percent: :

This system exhibits extrentely strohg directionality with
very small backflow. In addition, the relatively small

centages of internal shipments indicate that the four- catage :

taxonomy is effectively isolating’ processing stages. How-
ever, there remains a:problem with skips,. because only
57.30 percent of shipments are -going,to.the next forward
processing stage. This-serves to underline the importance of
specific. input indexes as components of the stage of process
system.

In‘ addition to considering the flow characteristics ‘of a
complete model involving all industries in the economy, the
ppl design has to consider the flow characteristics ofa more
limited model which. corresponds to the. ‘industries now
priced. Although the ppt is moving to increase its coverage
of the service ‘sector, the bulk of ppr pricing remains in
agriculture, mining, and’ manufacturing. The set of stage of
process indexes. that the Bureau is able. to. produce at this
time thus is:limited to “processors,” or those industries that
are primarily engaged: in the physical transformation of
goods. The net shipments of processors accounted for 42
percent of the total net value of output of all producing
industries in the economy, according to the 1977 input/out-.
put.tables. .

A flow analysis was calculated for the processor compo-
nent‘alone to evaluate the allocation design for the specific
set of industries that would be covered by currently available

indexes’ to those input/output industries that are proces

Producer Price Indexes. The flows in this analysis represent
‘shipments: by processors ‘to all: industries (processors and
nonprocessors) and to final demand. The results appear'in
table 3. The summary flow statistics: backflow, 5.76 per-
cent; internal flow, 10.59 percent; forward flow, 83.66 per-
cent,

The flow pattern for processors'glone is nearly as good as
for all industries. The pri system thus can be rather straight-
forwardly constructed in two steps. The first step is to pro-
duce input and output indexes for processors alone and for
processors’ input to final demand, using currently available
Producer Price Indexes. The second step is:to-construct a set
of indexes for nonprocessors and for the total economy as
pptindex coverage is expanded, The new stage of process
indexes just introduced reflect completion of the first step of
the long- -term construction of this system. ‘

Output indexes for processors

The result of the allocation process described above was
to place each of the 537 input/output industries in its appro-
priate stage of process: To create PPI output price indexes,
it is necessary to match the ppl four-digit industry net output

and then to weight theth appropriately.

The Department of Commerce publishes a general con-
cordance between the: input/outputTM ‘industry classification
and’the Standard Industrial Classification. This leads to
unique’ assignment of most four-digit pri industries which

are based on the sic system, For those remaining cases in
which there was not a oné-to-one niatch between inputout-
put and PPI industries, the Ppl industries were assigned to the
input/output industry that appeared to reflect the bulk of the
Pbr industry’s shipments’ value. Through this process, each
ppr four-digit industry was assigned to one, and only one,
stage of process. The final allocation of PPr industries by
stage of process appears in €xhibit 1: :

The industries are weighted into the stage of process total
based on their 1982 net output value of shipments: The net
oufput value includes ‘only that portion ‘of output ‘value
which goes to industries in other’stages of process and
excludes shipments 2 among industries within a'stage of proc-
ess. Net otitput weighting eliminates multiple counting of
price change by weighting ‘only those prices ‘that affect other
economic sectors. The specific methodology for the indus-
try weights within a stage of process is to multiply the 1982
total value-of industry shipments, generally available from
either the 1982 Census of Manufactires or Census of Min-
eral Industries, by a net output ratio calculated from the
input/output tables. The-net output ratio is the proportion of
industry shipments that Boe to industries outside the Stage
of process.

“The net output weights are then applied to then PPI four-
digit industry indexes, as’ carrently published in table 5 of
the Bureau’s publication Producer Price Indexes , to-calcu-
late aggregate indexes by. stage of process: ‘Several ‘sub-


MONTHLY LABOR REVIEW April 1988 © Stage of Process Price System for PPI

Industrial inorganic chemicals, n,¢.c.

Exhibit 1, Final allocation of Producer Price Index industries by stage of process Sette beg

sic. f : Industry sIC Industry.
Genie processors, 2821 | Plastic ‘materials and resins

os | Com. oe 2823 | Cellulosic manmade fibers

0116 | Soybeans 2824 | . Noncellulosic organic fibers

F was 2843 Surface-active agents’

1011 Iron ores pi 2861 Gum and wood chemicals

1021 | Copper ores 2865 | Cyclic (coal tar) crudes and intermediates, organic

1031 | Lead and zinc ores dyes and pigments MSIE a

~~ 1 1041 | Gold ores 2869 | Industrial organic chemicals, n.e.c.
1 1044 | Silver ores spt 2873 | Nitrogenous fertilizers :

1051 | Bauxite and other aluminum ores: 2874 | Phosphatic fertilizers.

1061 Ferroalloy ores : 2875 |: Fertilizers; mixing only

1094 | Uranium, radium, and vanadium ores 2879 Agricultural chemicals, ‘n-e.c. °

1099 |: Metal ores, n.e.c. ; 2893 | Printing ink

1111 | Anthracite 3274 | Lime

1112 | Anthracite ‘mining services’ . 3295-) Minerals and earths, ground or treated

1211 | Bituminous coal and lignite " 3313 | Electrometallurgical products :
| 1213 | Bituminous coal.and lignite mining services 3331/| Primary copper

1311 | Crude petroleum and natural gas : 3332') Primary smelted and refined lead

1321 | Natural gas liquids 3333: | Primary zine _

1389 | Oil and gas field services, n.e.c.: 3334") Primary aluminum :
bos 3339 Primary nonferrous metals, n.e.c.
| 1452. | Bentonite 3341 | Secondary nonferrous metals ~~

1453 | Fire clay 3398 | Metal heat treating :

1454 | Fuller’s earth. 3399 Primary metal products, n.e.c.

1455 | Kaolin and ball clay. > ; :

1459 | Clay and related minerals, n.e.c, 3412 | Metal barrels, drums, and pails

1472. |. Barite . 3565 | Industrial patterns

1473. |. Fluorspar 3624 | Carbon and graphite products

1474 | Potash, soda, and borate minerals 5 ‘

1475 | Phosphate rock : . Primary processors.

1476 | Rock salt ;

1477 | Sulfur = ‘ * 4 Out Wheat

1479 | Chemical and fertilizer mineral mining, n.e.c. 0112 | Rice *

1481 Nonmetallic minerals (except fuels) services 0131 |. Cotton

1492 | Gypsum mining a 0132 | Tobacco

1496: |, Talc, soapstone, and pyrophylllite 0133: | Sugar crops

1499 | Miscellaneous nonmetallic minerals “ -

0211 | Beef cattle feedlots

2048. | Prepared. animal. feeds, n.e.c. 0212 | Beef cattle, except feedlots

2298 | Cordage: and twine 0213 |. Hogs

2393. | Textile bags + ! 0214 | Sheep and goats .

2411 | Logging camps and logging contractors 0241 | Dairy’ farms aS
|, 2448 Wood pallets and skids. : 0251 Boiler, fryer, and roaster chickens

2611 Pulp mills 0252 |. Chicken eggs

2631 | Paperboard mills 0253 | Turkeys and turkey eggs
| 2646 | Pressed and ‘molded pulp goods 0254 | Poultry hatcheries

: 0259 | Poultry: and eggs, n.e.c,

2753 Engraving and plate printing 0271 Fur-bearing animals and rabbits

2782 | Blankbooks and looseleaf binders 0272 | Horses and other equines -”

2791 | Typesetting 0279 | Animal specialties, n.e.c.

2793 | Photoengraving . 0912 | Unprocessed fin fish

2794 | Electrotyping and stereotyping ©

2795 | Lithographic platemaking services : 1411} Dimension stone .

‘ me 1422 |. Crushed and broken limestone

2812 | Alkalies and chlorine 1423 | Crushed and broken granite, nec,

2813 | Industrial gases 1429 r and broken stone, n,e.c.

36 Inorganic pigments 1442 | Construction sand and gravel,

19 1446 &

Industrial sand

10



New stage of process price system
developed for the Producer Price Index

The new industry-based sister applies inputloutput
transaction. relationships.to the measurement .—

of industrial price change

ROBERT GADDIE AND MAUREEN ZOLLER

A new industry-based stage of process price index system
was first published with the release of the Producer Price
Index for January 1988: This new index system for the first
time combines the industry price indexes developed through
the Producer Price Index revision with inter-industry trahs-
action data from the Department of Commerce Input/Output
Tables of the United States to create'a rigorous input/output
price model of the industrial economy. Development and
publication of this new set of industry-based stage of process
indexes accomplishes one of the: major ‘objectives of the
Producer Price Index revision.' This revision began in 1977

and now covers virtually all of the: nearly 500 Standard

Industrial Classification (sic) industries in the mining and
manufacturing sectors of the economy.
In addition to the new: industry-based ‘ stage of process

price system, the Bureau is continuing to publish the tradi- °
tional commodity-based stage of processing system, which _

has been the focus of Producer Price Index presentation and
analysis since 1978.

The new industry-based stage of process system consists:

of the following specific indexes:

1. Four major output indexes
a, Crude processors
b. Primary processors
¢. Semifinished processors
d. Finished. processors

Robert Gaddie ‘and Maureen Zoller are economists in the Office’of Prices

and Living Conditions; Bureau of Labor Statistics.

2. Four 'major input-indexes with two major subindexes
for inputs to final demand
a. Inputs to primary processors
b. Inputs to semifinished processors
c. Inputs to finished processors
d. Inputs’ to final demand
@ Inputs to personal consumption
(ii) Inputs to capital investment

These new indexes reflect the following advancements in
concept and approach:

e Explicit conceptual definition of the type of index pro-
duced. In this new system, each index: is ‘explicitly
either an index of output from or an index of input to
a defined economic activity.

@ Rigorous allocation of industries to processing stages,
using inter-industry shipments flow data developed

_ from the Input/Output Tables of the United States.

e Use of net output and net input weighting to eliminate
multiple counting of price change within-the stage of
process system.

This article discusses the economic interest and concep-

"tual foundation of stage of process indexes, the algorithms

for assignment of industries to Processing stages, and the
detailed methods of weighting and calculation.

Economic interest

: Although a single number often is used to summarize the
rate of inflation in the economy, there. are, at any given


Exhibit 1. Continued—Final-allocation of Producer Price Index industries: by stage of process
sic Industry sIC Industry
Semifinished processors (cont) 3999 | Manufacturing industries, n.e.c.
3563 Air and gas compressors om
3564 | Fans and blowers Finished processors.
3566 Speed. changers, drives, and gears a .
3568 | Power transmission equipment, n.c.c. 1081 | Metal mining services
3579 | Office machines, not elsewhere classified, and 1381 |. Drilling oil and gas wells
: typewriters i 1382 Oil and gas exploration services
3585 | Refrigeration and heating equipment
3589 | Service industry machinery 2013. | Sausages and other prepared meats
2021 Creamery butter
3612 | Transformers 2022 | Natural and processed cheese
3613 | Switchgear and switchboard apparatus 2024 | Ice cream and frozen desserts
| 3621 | Electric motors and generators 2032 |. Canned specialties
3622 Industrial controls 2033 Canned fruits and vegetables
3623 | Welding apparatus, electric 2034 Dried and dehydrated fruits, vegetables and soup. .
3629 Electrical industrial apparatus, n.e.c. _mixes °
3639 | Household appliances, not elsewhere classified 2035 | Pickles, sauces and salad dressings
3641 | Electric lamps ‘ 2037 | Frozen fruits and vegetables
3643 | Current-carrying wiring devices 2038 | Frozen specialties
3644 | Noncurrent-carrying wiring devices
3645 | Residential lighting fixtures’ 2043 | Cereal breakfast foods
3646 | Commercial lighting fixtures 2045 | Blended and prepared flour
2047 Dog, cat, and other pet food
3647 | Vehicular lighting equipment 2051 | Bread, cake, and related Products
3648 | Lighting equipment, n.e.c. 2052 | Cookies and crackers
3671 | Electron tubes, all types 2065. | Confectionery products
3674 | Semiconductors and related devices 2067 | Chewing gum.and gum base
3675 | Blectronic capacitors 2082 | Malt beverages
3676 Resistors for electronic applications 2086 Soft drinks
3677. | Electronic coils, transformers, and other inductors 2091 | Canned and cured seafoods :
3678. | Connectors: for electronic applications 2097 | Manufactured ice
3679. | Electronic components, ‘n.e.c. 2098. | Macaroni, spaghetti, and oodles
3691 | © Storage batteries: 2111 "| Cigarettes
3694 | Electrical equipment for internal combustion engines 2121 | Cigars
3699, | Electrical equipment and supplies, 1n.c.c. ‘ 2131 | ‘Chewing and smoking tobacco and snuff
3714. |. Motor vehicle parts and accessories 2251 |. Women’s hosiery knit on 300.needles or ‘more
3724. | Aircraft engines. and engine parts and women’s knee-high socks
3728 | Aircraft parts and ‘auxiliary equipment, n.c.c. 2252 | Hosiery, n.e.c.
3764 | Guided missileand space vehicle propulsion units 2253 |. Knit outerwear
and propulsion unit parts 2254 | Knit underwear and nightwear
3769 | Guided missiles and:spgce vehicle parts and auxiliary 2259 | Knitting mills, n.e.c.
equipment 2311 Men’s and boys’ suits and coats’
2321 Men’s and boys’ shirts (except work. shirts)
3822 Environmental controls and nightwear
3841 | Surgical and medical instruments and apparatus 2322 |. Men’s and boys’ underwear
3842 | Surgical, orthopedic and prosthetic appliances and 2323 Men’s and-boys’ neckwear
supplies 2327, Men’s and boys’ separate trousers
3843. | Dental equipment and supplies 2328 | Men’s and boys’ work clothing
3861 Photographic equipment and supplies 2329. |. Men’s and boys’ clothing, n.e.c. sete :
2331 Women’s, misses’, and j Juniors’ blouses, waists
3915 Jewelers’ materials and lapidary work and shirts
3962 | Artificial flowers %
3963 Buttons 2335 Women’s, misses’, and juniors" dresses
3964 | Needles, pins, and fasteners 2337. | Women’s; misses’, and juniors’ suits and coats.
3991 Brooms and brushes” 2339 | Women’s, misses’, and juniors’ outerwear, n.e.c.
3993 Signs and advertising. displays 2341 Women’s and children’s underwear and ‘nightwear
3995. | Burial caskets 2342 | Brassieres and allied garments. - -
3996 | Hard surface floor coverings 2351. -| Millinery e

13


MONTHLY LABOR REVIEW April 1988 ¢ Stage of Process Price System for PPI

Exhibit 1. _Continued—Final allocation of Producer Price Index industries by stage of process

2732

Book printing

SIC Industry sic Industry
Semifinished processors (cont) 2741 | Miscellaneous publishing
2061] Raw cane sugar mills 2789 | Bookbinding and related work
2062 Cane sugar refining
2063| Beet sugar processing 2831 | Biological products ;
2066| Chocolate and cocoa products 2833 | Medicinal chemicals and botanical products
2074| Cottonseed oil mill products Gn bulk) - |
2077] Animal and marine fats and oils 2834 | Pharmaceutical preparations
2079] Shortening and cooking oils 2892 | Explosives
2083
2084 | Wines a ty Eu spirits 2951 | Paving mixtures and block
2085| — Distilled liquor, except brandy 2952 | Asphalt felts and coatings
2087| — Flavoring extracts and sirups, n.e.c. bret Turicating cils ane Breases
2092 Fresh fs Ares. inn Ss
shoe | Rresh oF frozen packaged fish 3041 | Rubber and plastics hose ‘and belting
] 2099| - Food preparations, n.e.c. 3069 | Fabricated rubber products, n.e.c.
2141] Stemmed and redried tobacco
: 3111 | Leather tanning’ and finishing
2211| Cotton broadwoven fabric 3131 | Boot and shoe cut stock and findings
2221} Synthetic fiber and silk broadwoven fabric :
2231| — Wool weaving and finishing 3251 | Brick and structural clay tile
2257|. Circular knit fabrics 3253 | Ceramic wall and floor tile’ ©
2258| Warp knit fabrics 3255 | Clay refractories
2261] — Finished cotton broadwoven fabric 3259 | Structural clay products, n.e.c.
2262| Finished synthetic fiber and silk broadwoven fabric 3261 | Vitreous plumbing fixtures
2271 Woven carpets and rugs: 3262 | Vitreous china food utensils
2272| Tufted carpets and rugs 3271 | Concrete block and brick
2279| Carpets and rugs, n.e.c. 3272 | Concrete products
2284| Thread mills 3273 | Ready mixed concrete
2292] Lace goods 3275 | Gypsum products
2293| Padding and upholstery filling 3281 |. Cut stone and stone products
2295| Coated fabrics, not rubberized 3296 | Mineral wool
2394 — Canvas and related products 3357. | Nonfertous wire drawing and insulating.
2395] Pleating, stitching, and tucking 3411 | Metal cans
2396| Automotive trimmings, apparel findings, and related 3425 | Hand saws.and saw blades
products 3429 | Hardware, n.e.c.
2397|. . Schiffli machine embroideries, 3431 | Metal sanitary ware
2399| Fabricated textile products, n.e.c. 3432 | . Plumbing fixture fittings and brass goods
3433 | Nonelectric heating equipment
2426| Hardwood dimension and flooring 3441 | . Fabricated structural metal
2429| Special product sawmills, n.e,c. 3442 | Metal doors, sash and trim
2431} Millwork 3443 | Fabricated plate work
2434 Wood kitchen cabinets: 3444 Sheet metal work
2435| Hardwood veneer and. plywood 3446 | Architectural and ornamental metalwork
2436] Softwood plywood 3448 | Prefabricated metal buildings
2439} — Structural wood members, n.e.c. 3449. | Miscellaneous metal work
2452 Prefabricated wood buildings and components 3465 | . Automotive stampings
2491] Wood preserving . 3466 | Metal crowns and closures
3493 | Steel springs, except wire
2517| — Wood-tv and radio cabinets 3494 | Valves and pipe fittings
2519|.. Household furniture, n.e.c. 3495 | Wire springs
2531} Public building and related furniture 3496 | Miscellaneous fabricated wire products
2541] Wood partitions and fixtures 3497 | Metal foil and leaf
3498 | Fabricated pipe and fabricated pipe fittings
2643 | .. Bags,.except textile bags.
2649 |. Convered paper, products, n.e.c. 3519 |  Intemmal combustion engines, n.e.c.
2711) ». Newspaper publishing 3534 | Elevators and moving stairways
2721] Periodical publishing 3536 | Hoists, cranes and monorails
3561

Pumps and pumping equipment

2



(une 1987=100)

Table 5. Producer Price Indexes and percent changes for net material input to Industry stage of process: and final demand.

Unaclsed perce changes

‘Special groupings:

67.004 | 101.6 | 1022
91573 | 1010. | 1019
@. 017 | 101.0
39.687 | 1015. | 1010

101.5 @) @) 8 06 00 O2
1017 8) @) 8) 09 0s 0.1
1028 @) @| @ 10 14 04
101.6 6) a} 8 ia 03 -03
101.1 8 @) 04 07 Ot
101.2 ) @} o “04 07}. 02

2 All data are subject to revision 4 months aftr original publication. Dataare not éeasonally

‘Not available.
4 Percent of final input to consumers.

portionate use is simply the total commodity consumption of
industries within the processing stage divided by the total
use of the commodity by all industries. The gross commod-
ity weights for the input indexes thus are the 1982 commod-
ity value of shipments, usually from the Census of Manufac-
tures or Census of Mineral Industries, multipled ‘by the
proportionate use ratio calculated as above from the input/
output tables. .

One further step is then required to: calculate the final
input index weights. The focus of interest in input indexes
is in flows into the stage of process, not internal transactions
within the stage of process: Therefore, the commodity usage

of each processing stage must be reduced by. a net input
ratio. The net input ratio, calculated from the input/output
tables, reflects the proportion of commodity inputs that is
received from industries outside the: processing stage of
interest. For example, the net input ratio for petroleum prod-
ucts would be high in all processing stages except the one
that includes the petroleum refining industry. .

The total weight available in a given. stage of process
input index for a single four-digit sic commodity is:

1. The 1982 total value of four-digit sie sormodity ship-
ments, multiplied by


Table 1. Generalized stage of processing input/output table, all Industries

Crude Primary Semiteieied Plahed onexpendtuce | inveciment | Bors | Gcreraness
—E F G6 H

as the real world problems that may occur in constructing
one, As mentioned previously, the fundamental idea of a
stage of process system is that there are identifiable and
distinct economic sectors which can be arranged sequen-
tially so that the outputs of earlier segments become inputs
to subsequent, ones up through final demand. Therefore, in
an ideal stage of process,system, all shipments would occur
in the cells just above the shaded diagonal. For example, in
an ideal stage of process system, all of the value of output
of primary producers would be in cell “C” and all of the
value of input to semifinished processors would.be in cell
“C.” Unfortunately, the real world is more complex.

Variations from the ideal stage of process flow take the
following forms:

© Backflow occurs when part of the output of:a ‘given stage
of process is consumed by an earlier stage of process.
Cell “A” in table 1 represents’backflow because output of
primary producers is consumed by crude producers.: For

example, the refined petroleum industry is a primary pro- .

ducer but crude goods industries all use petroleum _prod-
ucts such as gasoline. The.valie of these’sales is a back-
flow.
Internal flow occurs when part of the output of a given
stage of process is consumed avithin that stage of process.
Cell “B” in table 1 represents internal flow because it is
both output and input to primary producers. The refined
petroleum industry also sells gasoline to other primary
industries. The value of these sales is an internal flow.”
© Skips occur when part of the output of a-given stage of
process is consumed by stages of process beyond the-one
next forward. Cell “D” in table 1 represents a skip be-
cause part of the output of primary producers is.consumed
by finished producers, a category two stages forward
from primary. Continuing the petroleum example, the
refined petroleum industry sells ‘a portion of its products
directly to finished goods Producers. The value of these
sales is a skip.
© Leakages occur if some portion of ‘output does not appear
as input anywhere in'the system. This cannot occur if the
stage of process system is comprehensive of all transac-

tions, but it is of interest because leakage does occur in
partial systems. For example, pp! pricing at this time does
not include motor freight (trucking). Therefore, in a stage
of process design based on the current PPI price universe,
the sales of gasoline and diesel fuel to the trucking indus-
try will simply “leak” out of the system. These outputs
will not appear as inputs because the trucking industry
which consumes them is not priced.

Much of the discussion of stage of process design.empha-.
sizes minimization of backflow as the primary goal. Back-
flow is a substantial problem, because it introduces circular-
ity into what is supposed to be a ‘sequential system.
Additionally, if output is flowing backward, it obviously
impairs the forward directionality of the:index system which
is crucial to its analytic usefulness.

The existence of internal flow has some of the same

. effects. While internal flow does not cause circularity in the

system, it does reduce its forward directionality. Equally as
important if not moreso, large internal flows would-tend to.
indicate ‘a faulty taxonomy. That is to say, if industries
within a stage of process are substantially shipping-to each
other, there probably are within that stage of process two or
more real processing ‘stages which should be separated. °-

The pPI industry.stage of process design. takes both back-
flow and internal flow into account by. emphasizing the goal
of maximum net forward flow. In terms of table ‘1, this
means ‘that the*system should maximize the: value of ship-
ments appearing above and to the right of the shaded'diago-
nal. 2

Skips and leakages present.a somewhat different set of
problems. While they do not affect directionality of the
system, they do create difference between the-output of one
processing stage and inputs ‘to the next. Leakages area
particularly significant problem because current PPI pricing
is substantially limited to mining, manufacturing, and agri-
culture. Pricing of the service sector is spotty and-is only
slowly being expanded:

Because -'skips: and’ leakages cannot at this time be
avoided, the PPI stage-of process system explicitly provides
material input indexes for each stage of process. beyond


MONTHLY LABOR REVIEW April 1988 © Stage of Process Price System for PPI

while the traditional stage of process system is a commodity
transformation model based on degree of fabrication and
end use:

The new industry-based stage of process system allocates -
industries to one, and only one, processing stage. It then —

measures price change of inputs to and outputs from the set
of industries composing each stage of process. The
traditional: commodity stage of process structure allocates
commodities based-on their degree: of fabrication and-end
use. The indexes in the traditional-stage of process structure
are. not specifically designed «as. either input or output
~ indexes.

Nevertheless, these two assignment mechanisms lead to

similar results in many. cases. Wheat, flour, and bread are

assigned to sequential processing stages in-both the tradi-.. -

tional commodity and ‘new industry stage of process struc-
tures. This. reflects both the degrees of fabrication:in the
production of bread and the way transactions actually flow
between industries: in the economy.

However, one way in which differences may occur can be
seen in the treatment of food grains, such as. wheat versus
feed grains such as corn. In an index: structure based on
degree of fabrication, food grains.and feed. grains look sim-
ilar. They are both raw agricultural products.

On the other-hand, food grains and feed grains are not the
same in terms of the way: they. get to final. consumption.
Wheat, for example, takes the direct route of wheat-flour-
bread mentioned above. In contrast, corn goes to final

demand through an additional step because it is primarily.

input ‘to livestock production, another raw agricultural
industry:

In the traditional commodity system, food grains, feed.
grains, and livestock. appear at the. same. stage of process
because: they. are all raw. agricultural: products. In. the
industry-based structure, food grains and livestock appear at
the ‘same stage of process because their paths te final de>
mand are similar, and feed grains appear at an earlier stage
of process. This-reflects the fact that changes in feed grain

prices are likely to take longer to get to final demand than
would changes in food grain prices.

These important differences in how the new industry-
based and the traditional commodity-based stage of process

"Systems are constructed make it difficult to match up: in-

dexes from the two systems. In the case of Finished Goods,
the third stage in the traditional: commodity system, a close
match in the:industry system does exist, however. The tradi-
tional Finished Goods index explicitly defines as finished
products those products that go to final demand for personal
consumption expenditures and. capital investment. The
index weights within Finished Goods reflect commodity
usage by personal consumption expenditures -and capital
investment. That is the same conceptual basis as for the
industry-based input index for final demand.

This is not to say that the industry-based input index to
final demand will behave precisely the same as the current
Finished Goods index. The calculation methods are some-
what different and coverage varies to some extent. The
overall conceptual designs of the input index to final de-
mand and the Finished Goods index, however, are essen-
tially the same.

At the earlier stages of process in the commodity system
there are no precise industry-based analogs. The current PPi
Crude Materials, index, for example, is- neither a conceptual
nor operational: match to the crude processors output index
in the industry system. Neither does the commodity-based
Intermediate: Materials, Supplies, .and Components index
have a precise industry-based equivalent.

The major analytic innovation of the industry-based stage
of process. system, therefore, resides not at the end point,
which is similar to ‘the commodity system, but in the index.
sequences that trace price:flows through the economy. In
these areas, the precise definition of input and output in-
dexes, the rigorous allocation of industries based on inter-
industry shipment flows, and the use of net input arid net
output weighting, can be expected to, substantially enhance

_ the analytic power of the Bureau’s stage of process system
O

for producer prices.

| FOOTNOTES

1 John F. Early, “Improving the measurement of producer price change,”
Monthly Labor Review , April 1978, pp. 7-15.

2 William Nordhaus and John Shoven; “Inflation 1973: The Year of
Infamy,” Challenge; May/June 1974, pp. 14-22.

3.Two papers prepaied by the Wastiington-based consulting firm of Joel
Popkin’ and Company contributed significantly to the conceptual develop-
ment of the industry-based stage of process design: “A Stage-Of-Process

16

Price Index.Framework,” July 1980; and “Recommendations For Detailed
Classification and Aggregation Structure For The Revised: Producer Price
Index In’a Stage-Of-Process Framework,” May 1983.

4 For a discussion of the concepts and methodology of industry net
‘output indexes, see Early, “Improving the measurement”; and BLS Hand-
book of Methods’; Bulletin 2285 Bor of Labor Statistics, 1988), chapter
7, “Producer Prices.”


MONTHLY LABOR REVIEW April 1988 ¢ Stage: of Process Price System for PPI

time, a variety of rates of price change which characterize’

different industries and economic sectors. In 1987, for ex-
ample, the widely cited Producer Price Index (Ppt). for Fin-
ished Goods rose 2.1, percent. However, in the same year,
passenger car prices fell 3.1 percent while gasoline prices
climbed: 20.5 percent. Also in 1987, the index for Crude
Materials moved up 8.8 percent and that for Intermediate
Materials, Supplies, and Components increased 5.5 percent.

‘A major challenge in constructing price indexes is to
develop an index system that summarizes this diversity of
price change into meaningful analytic constructs. The Bu-.

~reau’s chief mechanism for accomplishing this is the stage
of process structure, which has been its primary vehicle for
publication and analysis.of industrial price.change since.
1978.

The basic. idea of a stage of process system is that the
economy can be subdivided into distinct economic segments
which can be arranged sequentially so that the outputs of
earlier segments become inputs to subsequent ones, up
through final demand. As a simple example, one economic
sector may produce wheat, which is input to another that
produces flour, which is input to another that produces
bread. To the extent that such-a sequential system of proc-
essing ‘stages can be defined, it is possible to trace the
transmission of price change through. the economy and to
develop information on: both the timing and magnitude of
price passthroughs to. final demand.

The stage of process approach. is. of particular: interest
when inflationary pressures are first reflected in crude com-
modities. This:.was. certainly the case with’ the oil price
shocks of the 1970’s, but there -has long been concern
among economists about how price: changes in basic indus-

; transmitted to other industries: and

economic sectors.:

‘At the time of the 1973-74 oil” ‘price’ ‘shock, the Bureau’ 's
major publication vehicle for producer prices: was the “All
Commodities” index; which included the. full: range: of
priced items irrespective of their degree of fabrication. This
index became: subject to considerable criticism.as oil prices
surged because the crude oil price increase was multiplied as
it passed through into the. cost: structures of, first, refined
petroleum products manufacturers and then to other produc-
ers.as the’higher energy prices were embodied in their cost
structures.”

With a stage of process. approach; this multiple counting
of price change in the same index is limited. In addition, the
actual transmission: of the crude changes is more. easily
discerned than when it is masked in a single. All Commodi-
ties index number.

In 1978, the Bureau shifted its publication emphasis from
the All Commodities index to the commodity-based stage of
process system. The latter set of indexes had been calculated
for many years-as an analytic aid. In the commodity-based
stage of process system, products priced in the PPI were
allocated to three stages of process based on their degree of

fabrication and end use. Because industry indexes were not.
available in the ppt system, it was impossible to create ag-
gregates that would specifically reflect inputs :and outputs of
defined economic sectors. But it was at least possible to
separate out:major stages of.a product’s fabrication to miti-
gate multiple counting of price change.. The Finished Goods:
index was. emphasized because it measured the prices of
goods nearest final consumption. The Crude and Intermedi-.
ate indexes served both as price measures for less fabricated
goods and as possible indicators of future movements in
Finished Goods prices as price changes were passed ‘ont
the economy.

- While the emphasis on the stage of process system was

certainly an analytic advancement:from summarizing all

price change in a single index number, the commodity-
based stage of process system still contains some multiple
counting, particularly within the Intermediate’ Materials
index, and is not analytically rigorous in composition or
input/output definition. Therefore, thé Bureau undertook an
effort to produce a stage of process system which would
Teflect ‘the actual input/output’ flow of transactions in the
economy and which would totally eliminate multiple count-
ing of price change.? The new industry-based stage of proc-
ess system is the result of that effort.

Conceptual design

An industry-based stage of process design. places indus-
tries in processing stages based on their transaction relation-
ships to other industries. For example, the agricultural in-
dustties sell wheat to the flour milling industry. which sells.
flour to.the bakery: industry. In an industry-based stage of
process system, these industries would be placed in sequen-
tial stages, because: that is the way the sales and the cost
impacts flow... :

* The industry-based stage of process structure is explicitly -
based on.an input/output matrix as displayed in table 1, The
left hand column of table 1 consists of all the producing
industries:in the economy,’ plus imports.. Along the top of.
the table are arrayed the same economic sectors,.along with
final demand. Each, box or cell within the matrix represents
the output of the category in the left-hand column. which is
consumed ‘by the category. at the top of the column. For
example, cell “C” represents the-output of primary goods
producers which is consumed by producers of semifinished
goods:

An output index for primary producers will include all of
the transactions in cells “A” through “H,” except cell “B,”
which represents the value of salés of primary producers to
other primary producers. Alternatively, an input index for
primary producers will cover transactions in cells “I,” “J,”

““K,” and “L” in the column below. primary. producers.

Again, cell “B” is excluded because it Pontains only internal
sales among primary producers. :

.This-generalized input/output matrix can be used to char-
acterize the basic flow of a stage of process’system as well


MONTHLY LABOR REVIEW April 1988 ¢ Stage of Process Price System for PPI

time, a variety of rates of price change which characterize
different industries and economic sectors. In 1987, for ex-
ample, the widely cited Producer‘ Price Index (ppt) for Fin-
ished Goods rose 2.1 percent. However, in the same: year,
passenger. car prices fell 3.1 percent while gasoline. prices
climbed 20.5 percent. Also in 1987, the index for Crude
Materials moved up 8.8 percent and that for Intermediate
Materials, Supplies, and Components increased 5.5 percent.

‘A major challenge. in constructing price indexes is to
develop an index system that summarizes this diversity of
price change into meaningful analytic constructs. The Bu-
reau’s chief mechanism for accomplishing this is the stage
of process structure, which has been its primary vehicle for
publication and analysis.of industrial price change since
1978.

The basic.idea of a stage of process system is that the
economy can be subdivided into distinct economic segments
which can be arranged sequentially so that the outputs of
earlier segments become inputs to. subsequent ones, up
through final demand. As a simple example, one economic
sector may produce wheat, which is input to another that
produces flour, which is input to another that produces
bread. To the extent that such-a sequential system of proc-
essing stages can be defined, it is possible to trace the
transmission of -price change through the economy and to
develop information on:both the timing and magnitude of
price passthroughs to final demand.

The stage of process approach is. of particular: interest

when inflationary.pressures are first reflected in crude:com-

modities. This’ was certainly the case with the oil price
shocks of the 1970’s, but there has long been concer
among economists about how price. changes in basic indus-
tries such as steel are transmitted to other industries: and
economic sectors. 2 :

At the time of the 1973-74 oil price shock, the Bureau’s
major publication vehicle for producer prices was the “All
Commodities” index, which included the. full range: of
priced items irrespective of their degree of fabrication. This
index became. subject to considerable criticism. as oil prices
surged because the crude oil price increase was multiplied as
it passed through into the cost structures of, first, refined
petroleum products manufacturers and then to other produc-
ers as the higher energy prices were embodied in their cost
structures.” :

With a'stage of process approach, this. multiple counting
of price change in the same index is limited. In addition, the
actual transmission: of the crude changes is more easily
discerned than when it is masked in a single All Commodi-
ties. index number.

In 1978, the Bureau shifted its publication emphasis from
the All Commodities index.to the commodity-based stage of
process system. The latter set of indexes had been calculated
for many years as an analytic aid. In the commodity-based
stage of process. system, products priced in the PP! were
allocated to three stages of process based on their.degree of

fabrication and end use. Because industry indexes were not.
available in the PP! system; it was impossible to create ag-'
gregates that would specifically reflect inputs and outputs of
defined economic sectors. But it was at least possible to
separate out major stages of a product’s fabrication to miti-
gate multiple counting of price change. The Finished Goods
index was emphasized because it measured the prices of
goods nearest final consumption. The Crude and Intermedi-
ate indexes served both as price measures for less fabricated
goods and as possible indicators of future movements in
Finished Goods prices as price changes were passed through
the economy.

- While the emphasis on the stage of process system was
certainly an analytic advancement .from summarizing all
price change in a single index number, the commodity-
based stage of process system still contains some multiple
counting, particularly within the Intermediate Materials
index, and is not analytically rigorous in composition or
input/output definition. Therefore, the Bureau undertook an
effort to produce a stdge of process system which would
feflect the actual input/output flow of transactions in the
economy and which would totally eliminate multiple count-
ing of price change.> The new industry-based stage of proc-
ess system is the result of that effort.

Conceptual design

An industry-based stage of process design places indus-
tries in processing stages based on their transaction relation-
ships to other industries. For example, the agricultural in-
dustries sell wheat to the flour milling industry which sells
flour to the bakery industry. In an industry-based stage of
process system, these industries would be placed in sequen-
tial stages, because that is the way the sales and the cost
impacts-flow.. = ‘ Z

- The industry-based stage of process structure is explicitly
based on an input/output matrix as‘displayed in table 1..The
left hand column of table 1 consists of all the producing
industries: in the economy, plus imports. Along the top -of
the table are arrayed the same economic sectors, along with
final demand. Each.box or cell within the matrix represents
the-output of the category in the left-hand column which is
consumed by the category at the top of the column. For
example, cell “C” represents the output of primary goods
producers which is consumed by producers of semifinished
goods.

An output index for primary producers will include all of
the transactions in cells “A” through “H,” except cell “B,”
which represents the value of sales of primary producers to
other primary producers.’ Alternatively, an input index for

i producers will cover transactions in cells “I,” “J,”
“K,” and “L” in the column below. primary. producers.
Again, cell “B” is excluded because it contains only internal
sales among primary producers.

This generalized input/output matrix can be used to char-
acterize the basic flow of a stage of process ‘system as well



MONTHLY LABOR REVIEW April 1988 © Stage of Process Price System for PPI

Exhibit 1. _Continued—Final allocation of Producer Price Index industries by stage of process
SIC Industry sIc Industry
Finished processors (cont) 3511 | Turbines and:turbine generator sets
3523. | Farm machinery and equipment
2352 Hats and caps, except millinery 3524 Lawn and garden equipment
2361 Girls’, children’s, and infants’ dresses, blouses 3531 ‘Construction machinery
and shirts 3532 | Mining machinery and equipment
2363 Girls’, children’s, and infants’ coats and suits 3533 Oilfield and gasfield machinery and equipment
2369 | Girls’, children’s, and infants’ outerwear, n.e.c. 3535. | Conveyor and conveying equipment
: 3537 Industrial trucks and tractors
2371 Fur goods 3541 Machine tools, metal cutting-types
2381 Fabric dress and work gloves 3542 | Metal forming machine tools
2384 Robes and dressing gowns, except children’ 's 3546 Power driven hand tools
2385 Waterproof outer garments 3547 Rolling mill machinery
2386 Leather. and sheep lined clothing © 3549 | Metalworking machinery, n.e.c.
2387 Apparel belts
2389 Apparel’ and: accessories, n.e.c: 3551 Food products machinery
2391 Curtains and draperies 3552 |. Textile machinery
2392 Housefurnishings. n.e.c, 3553 Woodworking
3554 Paper industries piel
2451 Mobile homes 3555 | Printing trades machinery
2511 ‘Wood household furniture; except upholstered 3559 Special industry machinery, n.e.c.
2512 |. Upholstered wood household furniture 3567 | Industrial process furnaces and ovens
2514 Metal household furniture 3569 | General industrial machinery, n.e.c.
2515 | Mattresses, bedsprings and sleep furniture 3573. | ‘ Electronic computing equipment
2521 | Wood office furniture 3574 | Calculating and accounting. machines
2522°|- Nonwood office furniture 3576 . |. Scales and balances except laboratory
2542 |. Metal partitions and fixtures 3581 Automatic merchandising machines
2591 Drapery hardware and blinds and shades 3582 Commercial laundry equipment.
2599 | Furniture and fixtures, n-e.c, 3586 | Measuring and dispensing pimps
2647 | Sanitary paper products 3631 Household cooking equipment and parts
2648 ‘Stationery products 3632 . |. Household refrigerators and freezers
2731 Book publishing 3633 Household laundry equipment
2771 Greeting card publishing 3634 Electric housewares and. fans.
. 3635. | Household vaccum cleaners
2841 Soap and other detergents 3636 | Sewing machines
2842 | Specialty cleaning, polishing and sanitation’ 3651 | Radio and tv's, phonographs, and related equipment
preparations 3652. | Phonograph records and prerecorded tapes
2844 | Toilet preparations 3661 Telephone and telegraph apparatus
3662 Radio and television communication equipment
2999 | Petroleum and coal products, n:e.c. 3692. | : Primary batteries, dry and wet
3021 Rubber and plastic footwear 3693 X-ray and eléctromedical equipment
3142 | House slippers
3143 Men’s footwear — 3711 Motor vehicles and passenger car bodies
3144 Women’s footwear 3713 Truck and bus bodies
3149 | -Footwear, except rubber, n.e.c. 3715 Truck trailers
3151 Leather gloves and mittens: 3716 Motor homes built on purchased chassis
3161 | Luggage 3721. | Aircraft
3171 Women’s and children’s handbags and purses 3731 Ship building and repairing
3172 Personal leather goods, except women’s handbags 3732 Boat building and repairing
and purses 3743 Railroad equipment
3199 | Leather goods, n.e.c. 3751 ‘| Motorcycles, bicyéles; and parts
3761 Guided: missiles and space vehicles
3268. Pottery products, n.¢.c., including fine eathenware 3792 Travel trailers and campers
food utensils 3795 Full-tracked armored vehicles
3421 | Cutlery 3799 | Transportation equipment, n.e.c.
3482") Small arms ammunition, 30 mm and under ;
3483 Ammunition, except small arms, n.e.c. 3811 Engineering and scientific instruments
3484 Small arms, 30. mm and under. 3823 Industrial process control instruments :
3489 | Ordnance and accessories, n.e.c. 3824 .| Fluid meters and counting devices

14