6427.0.55.006 - Producer Price Indexes Weighting Patterns, 2015  
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EXPLANATORY NOTES


INTRODUCTION

1 This publication and associated data cubes contains the new weighting patterns for the producer price indexes. The re–weight was undertaken in line with the recommendations arising from the 2011 Review of the producer and international trade price indexes.

DEVELOPMENTS

2 Recommendations arising from the 2011 Review of the producer and international trade price indexes were implemented in the September quarter 2012. The outcomes of this review are recorded in the Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat.no.6427.0.55.004). One outcome of the review is that the ABS will increase the frequency of re–weighting the PPIs in line with international recommendations to update weights at a minimum of once every five years. The ABS will undertake additional research to firm up the possibility for more frequent PPI re–weighting. The schedule of release of the National Accounts I–O tables will influence this outcome.

3 From the September quarter 2015 index numbers for the Stage of Production, Input to the Manufacturing industries, Output of the Manufacturing industries and Output of the Services industries indexes have been calculated using a new weight reference period of 2012–13, derived from the Australian National Accounts: Input–Output Tables – Electronic Publication, 2012–13 Final (cat. no. 5209.0.55.001). Weighting patterns for the Output of the Construction industry are intended to be updated at a later date.

THE ROLE OF WEIGHTS

4 The weights used to compile the PPIs determine the impact a particular price change will have on the overall index. The PPIs are calculated from prices of products that are collected from a non–random sample of providers covering in–scope economic activities and products. The collected prices are first combined to compile indexes for each individual product. For example, several prices for different types of transactions for a detailed type of product may be collected from a range of providers. Price relatives are calculated for each specification. These price relatives are combined to produce the price index for the product. Once this has been done, the product price indexes are combined to produce the class, sub–group, group and subdivision indexes, and then the root level index. Each product is given a weight determined by its revenue as a proportion of total revenue (or expenditure, for an input index) for all products in the index during the reference period. To arrive at the aggregate index figure the price relatives of the individual products are multiplied by these weights to derive a weighted average aggregate index. Without explicit weights, relative price changes for all products in the price basket would be given equal weight in calculating the index, which may not be a true reflection of the importance of each priced product in terms of its share of total expenditure (for inputs) or market revenue (for outputs).

5 The Australian Bureau of Statistics (ABS) periodically updates the weights in PPIs and ITPIs to reflect changes in market structure. The faster the change in an economy’s market structure, the more frequently the weights in the indexes are updated. Recommended international practise is that PPI weights should be updated at a minimum of once every five years.

PERIOD COVERED BY WEIGHTS

6 The weighting structure of a price index plays a large part in determining the accuracy and reliability of the index. Key factors in selecting the period used to calculate the weights are:

  • The economic activity over the period should be reasonably normal/stable and representative of likely future activity
  • Close to the link period (the period where the weights are introduced to the index series).

7 The weight reference period and the link period used in a price index formula are rarely the same period in practise. For reasons of stability and representativeness, the weight reference period is frequently a year or longer period. New weights are introduced during a specific period, known as the link period. For a Lowe price index, weights are price updated to account for price changes between the weighting period and the link period. For example, the Producer Price Indexes are re–weighted using the latest available IO data; however, this re–weighting is undertaken as soon as the data are available, with application in the September quarter at the start of the next financial year. So weights for the PPI from, for example, 2012–13, are price updated to the June quarter 2015. This price updating accounts for changes between the average price over the 2012–13 year and the price observed in the three months ending 2013.

Details on how new weights are introduced into price indexes and the price updating process are discussed in Producer and International Trade Price Indexes: Concepts, Sources and Methods, 2014 (cat. no. 6429.0)