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4 The SOP indexes show the impact of price changes of products used in different stages of production in the same time period. For example, the price change observed for the manufacture of aluminium ingots will be reflected concurrently in the Intermediate demand stage of production index (previously referred to as Stage 2) and in the Preliminary demand stage of production index (previously referred to as Stage 1).
THE USE OF THE SOP INDEXES
5 The SOP indexes provide analysts with the potential for economy-wide inflation monitoring. Their explanatory power at a disaggregated industry level includes a product's contribution to price change for each stage of production headline measure.
6 At a more aggregated level, the SOP indexes allow comparison of final consumer domestic and final consumer import price inflation contributions, and comparison of final capital domestic and final capital import price inflation contributions. SOP final demand indexes also allows a breakup of price changes between consumer goods (household and government) and capital goods.
7 The graphs below illustrate the price change for the different stages of production indexes from the December quarter 1999 to the December quarter 2011. For ease of reference, they are presented using the current terminology.
8 Graph 1 illustrates that, on average, increases in prices are greater at successively earlier stages of production. During the period 2000 to 2003, Preliminary and Intermediate stage price increases were relatively low. Prices in these two stages then increased dramatically during the period 2003 to 2007, before dropping sharply in 2008 – a result of the global financial crisis (GFC). As the economy came out of the GFC, prices in these two stages resumed their upwards trajectory from 2009 to the present. In contrast, price increases in the Final stage show less volatility. However, there is still a consistent upwards trend in Final stage price levels, but at a consistently lower rate of increase than for the other two stages.
GRAPH 1 – COMPARISON OF STAGE OF PRODUCTION INDEXES
9 Graph 2 illustrates the price indexes at all three stages of production. There is no discernible visual lead–lag relationship between stages and time periods. The graph also highlights the volatility of price changes in the different stages of production, with Preliminary stage prices more volatile than Intermediate stage prices, which in turn are more volatile than Final stage prices.
GRAPH 2 – STAGE OF PRODUCTION INDEXES: COMPARISON OF PERCENTAGE CHANGES FROM SAME QUARTER IN PREVIOUS YEAR
GRAPH 3 – COMPARISON OF STAGE OF PRODUCTION COMPONENT INDEXES
11 Graph 4 illustrates that all SOP indexes experience predominantly positive inflationary pressures, though Preliminary and Intermediate stages are more likely than the Final stage to see deflationary quarters. Preliminary and intermediate stages both had a large price increase spike prior to the global financial crisis (GFC), immediately followed by a large deflationary spike during the GFC itself. Since the GFC, price increase pressures have returned to the patterns seen in the period 2003 to 2006.
GRAPH 4 – STAGE OF PRODUCTION INDEXES: COMPARISON OF PERCENTAGE CHANGES FROM PREVIOUS QUARTER
12 Graph 5 illustrates that during the period 1999 to 2011, the quarterly Final stage consumer price changes have been more volatile than the Final stage capital price changes. Final stage consumer price levels show frequent periods of price decrease, along with regular quarterly increases of 1–2%. Prior to the global financial crisis (GFC) in 2008, Final stage capital prices were increasing at approximately 1% per quarter. The GFC saw a decrease in Final stage capital price levels, with a subsequent post GFC return to a pattern of price level increases, but at a lower level than prior to the GFC.
GRAPH 5 – STAGE OF PRODUCTION INDEXES FINAL COMPONENT INDEXES: COMPARISON OF PERCENTAGE CHANGES FROM PREVIOUS QUARTER
13 SOP consumer and capital import price indexes also facilitate comparisons of price changes with respect to exchange rate variations from series such as the United States dollar (USD) and Trade Weighted index (TWI) (see Graph 6). This provides some indication of the influence of exchange rates on domestic producer inflation.
GRAPH 6 – STAGE OF PRODUCTION INDEXES, UNITED STATES DOLLAR AND TRADE WEIGHTED INDEX
14 The current SOP also provides disaggregation by domestic and imported inflation. However, imports price change information is based on goods prices only. Price changes for imports and exports of services are not incorporated within the ITPIs. In the medium term International Trade in Services price indexes are scheduled for inclusion into the ITPIs. Issues of scope expansion are more fully addressed in Chapter 4: Quality improvement and coherence of the Producer and International Trade Price Indexes.
15 From their inception, there was an expectation that the SOP indexes would provide a leading relationship to the Consumer Price Index (CPI). ABS research has shown this relationship not to be clearly apparent, with a contemporaneous relationship existing for all three SOP indexes and the CPI. This signals that the transmission of price change may be far more rapid than can be measured by a quarterly index, or that businesses operate in a more fluid way, expanding and contracting margins to compensate for business cycle influences. The lack of a leading relationship may be influenced by:
16 These and other possible reasons are addressed in various European Union and academic research papers on “sticky prices”.
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