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Industry versus product
4 From the September quarter 2012 producer price indexes relate to all products that are used or produced by establishments classified, according to ANZSIC 2006, to a specific industry, including secondary production. Prior to the September quarter 2012, producer price indexes related to produced products primary to a specific industry. Primary products are defined as products which are strictly classified to a particular industry, as defined by the Australian and New Zealand Standard Industrial Classification, 2006 edition (ANZSIC 2006). The production of products outside these strict industry classifications are considered as secondary production.
Gross versus net
5 Producer price indexes are compiled on a gross industry basis. This means that the scope of the indexes includes all transactions occurring within an industry and between that industry and other industries. This approach aligns with the principal purpose of the producer price indexes, which is to support the compilation of the Australian National Accounts and Balance of Payments.
Output and input
6 Producer price indexes are constructed as either output or input measures. The output producer price indexes relate to products produced by establishments classified to a specific industry. The input producer price indexes relate to products used by establishments classified to specific industries.
7 The valuation basis for the transactions covered by an output index is basic prices, defined as the amount received by the producer exclusive of any taxes on products and transport and trade margins (i.e. the pricing point is ex-factory, ex-farm, ex-service provider, etc.).
8 The valuation basis for the transactions covered by an input index is purchasers' prices, defined as the amount paid by the purchaser inclusive of any non-deductible taxes on products and transport and trade margins (i.e. the prices recorded in the index should be those relating to products 'delivered into store', 'delivered on site', etc.).
9 In reality, industry practice may mean that it is sometimes necessary to diverge from the conceptually ideal price in order to obtain actual transaction prices. For example, although the conceptually ideal price for the Output of the Manufacturing industries price indexes is ex-factory, in cases where costs such as handling and distribution are built into the manufacturer's selling price, they will be included in the index.
10 Similarly, for input indexes such as the Input to the House construction industry price index, which has a conceptually ideal price of delivered on site, it has sometimes been necessary to use the nearest actual transaction price available, e.g. prices of products supplied and fixed.
11 The Goods and Services Tax (GST) is excluded from all the prices recorded in the current producer price indexes because, in the main, it is deductible on business-to-business transactions. In the case of Services industries output indexes relating to business-to-household transactions, the GST is also excluded because the conceptually ideal price is basic prices (i.e. exclusive of product taxes).
Products and weights
12 The indexes are base weighted indexes of the Laspeyres form i.e. proportional weights for each of the components are fixed in some specified earlier period. The list of products and the weights are updated periodically to ensure they remain representative of the activities of products providers in the Australian economy. Index series compiled using updated weights are linked to earlier series to maintain a continuous series. Upper level weights are derived from the Australian National Accounts: Input-Output Tables - Electronic Publication, 2007-08 Final (cat. no. 5209.0.55.001) as well as other ABS and industry sources.
13 The main sources of ongoing price data are samples of business establishments. These can be buyers or sellers, dependent on whether the price is contributing to an input or an output price index. Practical considerations such as the relative degree of concentration of buyers, and of sellers, and the implications for sample size and cost will be taken into account when determining samples.
14 The main pricing methodology is specification pricing, under which a manageable sample of precisely specified products is selected, in consultation with each reporting establishment, for repeat pricing. In specifying the products, care is taken to ensure that they are fully defined in terms of all the characteristics which influence their transaction prices. As such, all the relevant technical characteristics need to be described (e.g. make, model, and features) along with the unit of sale, type of packaging, conditions of sale (e.g. delivered, payment within 30 days), etc.
15 When the quality or the specifications of a product being priced change over time, adjustments are made to the reported prices so that the index captures only pure price change. That is, any element of price change attributable to a change in quality is accounted for and removed wherever possible. If there is an increase (decrease) in the quality of a product, the price is adjusted downwards (upwards) to reflect the value of the quality change to the provider of the product. This technique is known as pricing to constant quality.
16 Another important consideration in establishing and maintaining price collections is to ensure that the prices reported are actual market transaction prices. That is, they must reflect the actual prices received (or paid) after taking into account all discounts applied to the transactions whether they be volume discounts, settlement discounts or competitive price cutting discounts which are likely to fluctuate with market conditions.
17 Any rebates also need to be considered. The collection of nominal list prices, or book prices, is unlikely to yield reliable price indexes and could result in quite misleading results if fluctuations in transaction prices are not captured. The ABS therefore asks provider business establishments to report details of the discounts they offer so that actual transaction prices can be calculated.
18 Specification pricing is not feasible in cases where the products are unique and not reproduced over time, e.g. the output of the Construction industries indexes and many customised business services. As a result, alternative pricing techniques need to be used, which sometimes require a compromise. Some of the approaches adopted include the use of model pricing, collecting unit values for reasonably homogeneous components of a product, input pricing and collecting charge-out rates (e.g. for a legal service).
19 Where prices of products are expected to move in a similar way, many of the directly priced products are taken to be representative of similarly classified products which are not directly priced. The main advantages of this are more effective use of ABS resources and a reduced burden on business establishments to provide the ABS with price information.
20 From the September quarter 2012, all producer price indexes have been constructed in accordance with the Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006 edition (cat. no. 1292.0). Prior to the September quarter 2012, the SOP series (Tables 1-10) were on an ANZSIC 1993 basis, while the other producer price indexes relating to products primary to specific industries were based on ANZSIC 2006 from the September quarter 2009 onwards. Further information on the latest industrial classification can be found in the Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002).
STAGE OF PRODUCTION PRODUCER PRICE INDEXES
21 Tables 1-10 present producer price indexes for the supply of products to the Australian economy in the SOP framework. The indexes cover both domestically produced and imported products, individually and aggregated. The SOP indexes are compiled from data used in the industry classification indexes, the international trade indexes and some additional data collections. The indexes are calculated on the index reference period 2011-12 = 100.0.
22 A detailed technical explanation of the SOP concept is contained in the Information Paper: Producer Price Index Developments, 1999 (cat. no. 6422.0). It should be noted that the experimental index numbers shown in that information paper are not comparable with currently published figures which are more up to date in terms of their coverage, reference period weights and index reference period.
23 SOP indexes are useful for analysing inflation in the Australian economy or, more specifically, for studying how price change for inputs used to produce final products is passed through to the price of those final products. Final products are those that are ready to be sold for immediate consumption, capital formation or export.
24 In concept the valuation of transactions in the SOP indexes is basic prices (see paragraphs 7-11). However, the use of component series from existing ABS price collections in some cases results in the valuation diverging from this ideal.
THE STAGE OF PRODUCTION CONCEPT
25 Under the SOP concept flows of products are categorised according to their economic destination on a sequential basis along the production chain. The basis for the categorisation is the Australian National Accounts: Input-Output Tables - Electronic Publication, 2007-08 Final (cat. no. 5209.0.55.001). In simple terms, transactions (flows of products) are placed in one of three stages, namely:
26 Within this framework, the flows can broadly be regarded as preliminary demand products feeding into the production of intermediate demand products which in turn feed into the production of final demand products.
27 SOP indexes are constructed on a gross industry basis in line with the concept supported by the principal purpose of the producer price indexes. SOP indexes minimise the multiple counting issues inherent in gross industry indexes by segmenting the economy into stages and measuring the price changes of transactions undertaken with the next stage of production. The stages cannot be aggregated, however a summary headline measure of general inflation is provided for each stage.
28 It should be noted that the indexes for each of the stages are all representative of a single (simultaneous) point in time which allows for analyses of price change within the stages as products flow through. This is useful since price changes for earlier stages of production may be indicators of future price changes for the later stages of production.
Transaction flow approach
29 It is important to note that the compilation of the ABS producer price indexes within the SOP framework is not structured around the products that are transacted. Internationally, some statistical agencies who make use of the SOP concept will allocate each product to a particular stage. The ABS makes no attempt to place individual products into a single stage of production as this would be very challenging due to a number of factors. For example, products such as wheat, wool and iron ore are exported in large volumes as well as being further processed within the domestic market. There are obviously many conflicting arguments for the allocation of such products to a single stage within the SOP framework.
30 The ABS has adopted a transaction flow approach for partitioning the flow of individual products into the different production stages. Under this approach the stage of production in which a transaction is placed is determined by where the product is consumed. For example, exported wheat and domestically used wheat are treated as different products for index construction purposes. Exported wheat is treated as a Final demand product while wheat to be processed domestically to make flour is considered to be a Preliminary demand product. Similarly, a product such as energy can appear within all three stages.
Scope and coverage
31 As the main focus is on domestic inflation, exports are excluded from the headline SOP series 'Final demand', as presented in the key figures on the front page and in Tables 1-6 of this publication. Index series for Final demand including exports are available in Table 10 of this publication.
32 Import transactions are included within the framework, recognising that they represent an important potential source of inflationary pressure.
33 In concept, the SOP indexes are intended to incorporate all flows of products within the economy. However, while goods are reasonably well represented, there are shortfalls in the coverage of many Services industries, including the major 'margin' services of retail and wholesale. This is a direct consequence of the limited coverage of the Services industries in the producer price indexes.
34 The increase in the importance of the Services industries to the Australian economy and the inherent difficulty in measuring price changes for many of these services have contributed to this shortfall in coverage. The expansion of Services industries price indexes coverage is a key objective for the ABS and consultation with users has helped to determine the priorities for the ABS Services Producer Price Indexes Development program which aims to progressively improve the coverage in these areas.
Products and weights
35 The products included in the stages, for both domestic supply and imports are given proportional weights that reflect the values of product flows. The weights are derived from the Australian National Accounts: Input-Output Tables - Electronic Publication, 2007-08 Final (cat. no. 5209.0.55.001).
Comparisons with the Consumer Price Index
36 Final demand indexes are presented as a representation of the changes in price for consumed products however, users should be aware that these indexes are not directly comparable with the Consumer price index (CPI). The two indexes differ significantly in concept and coverage with the main differences as follows:
MANUFACTURING INDUSTRIES PRODUCER PRICE INDEXES
37 The Output of the Manufacturing industries producer price indexes relate to all products that are produced by establishments classified to a specific industry, whereas the Input to the Manufacturing industries price indexes relate to all products used by establishments classified to a specific industry. They are important sources of data for the SOP indexes.
38 The Manufacturing industries indexes are available on the ABS website <http://www.abs.gov.au>. Table 12 presents individual price indexes of Output of the Manufacturing industries as well as quarter-on-quarter and year-on-year percentage changes for the Output of the Manufacturing industries price indexes. Table 13 presents the Input to the Manufacturing industries price indexes as well as quarter-on-quarter and year-on-year percentage changes for the Input to the Manufacturing industries price indexes. Basic prices are used for output indexes and purchasers' prices for input indexes (see paragraphs 7-11). Therefore, as far as possible, ex-factory prices are included in the output indexes. Delivered into factory prices are included in the input indexes.
39 Prior to the September quarter 2009, the Manufacturing industries indexes were constructed on a net sector basis with intra-sector transactions netted out. From the September quarter 2009, the Manufacturing industries indexes are constructed on a gross industry basis. The net and gross industry methods are more easily explained by way of an example. The transactions captured for a motor vehicle manufacturing GROSS industry index would include both the sales of the parts (including sales of parts to other business establishments in the same industry) and the sales of the finished cars - even though the price change of the parts would be included in the price change of the cars. On the other hand, a motor vehicle manufacturing NET industry index would measure only the price change of motor vehicles sold to other industries of the economy and would exclude the price change of the parts (sold to business establishments in the same industry) as a separate product.
40 From the September quarter 2009 onwards the Output of the Manufacturing industries indexes (Table 12) measure changes in the prices of products that are classified to ANZSIC 2006 Manufacturing industries that are sold or transferred to domestic establishments within or outside the Manufacturing industries for further processing, intermediate use or used as capital equipment or exported.
41 Similarly, the Output of the Manufacturing industries indexes for products classified to ANZSIC 2006 subdivisions and groups (Table 12) measure transactions within and outside the subdivision or group. Prior to the September quarter 2009 these series were constructed on a net sector basis. They excluded intermediate transactions in products classified to the ANZSIC 2006 subdivision that were sold or transferred within that subdivision or group for further processing.
42 From the September quarter 2009 onwards the Input to the Manufacturing industries indexes (Table 13) measure changes in the prices of products used in ANZSIC 2006 Manufacturing industries that have been purchased or transferred in from domestic establishments within or outside the Manufacturing industries, or imported. Similarly, the Input to the Manufacturing industries indexes for subdivisions (Table 14) measure input purchases or transfers within and outside the subdivision.
Products and weights
43 The index structures and weighting patterns for the Manufacturing industries input and output ANZSIC 2006 division indexes are presented in the Information Paper: Producer Price Indexes Weighting Patterns, 2012 (cat. no. 6427.0.55.006). Index structures and weighting patterns for the associated ANZSIC 2006 subdivisions and groups are available from the ABS website <http://www.abs.gov.au> as data cubes in that information paper.
CONSTRUCTION INDUSTRIES PRODUCER PRICE INDEXES
44 The Output of the Construction industries producer price indexes relate to outputs classified to ANZSIC 2006 Construction industries. The Input to the House construction industry index relates to products used by establishments classified to ANZSIC 2006 Class 3011 - House construction. The Output of the Construction indexes are important sources of data for SOP Final demand.
45 The Output of the Construction industries indexes is available on the ABS website <http://www.abs.gov.au>. Table 17 presents price indexes of the outputs from establishments classified to the Building construction subdivision and selected Construction industries classes. Table 18 presents the Input to the House construction industry price indexes as well as quarter-on-quarter and year-on-year percentage changes for each of the indexes. The valuation basis is basic prices for the output indexes and purchasers' prices for the input indexes (see paragraphs 7-11). Therefore, as far as possible, builders' selling prices are reflected in the output indexes, and delivered on site prices are reflected in the input indexes.
46 The Output of the Construction industries price indexes (Table 17) measure changes in prices of the outputs from selected Construction industries. Presented in this table are the ANZSIC 2006 Subdivision 30 - Building construction industries, which consists of three classes: Class 3011 - House construction, Class 3019 - Other residential building construction and Class 3020 - Non-residential building construction. Outputs from the Class 3101 - Road and bridge construction are also presented in this table.
47 The Input to the House construction industry price indexes (Table 18) measure changes in prices of products used in house construction, where a house is defined as a detached building predominantly used for long-term residential purposes and consisting of only one dwelling unit. The scope of the index approximates the ANZSIC 2006 Class 3011 - House construction.
48 The Input to the House construction index does not explicitly cover alterations, additions, renovations and repairs. It relates to the greater capital city statistical area for each state capital city.
Products and weights
49 ANZSIC 2006 class output indexes at the national level are aggregated to the relevant group and subdivision using weights derived primarily from values of the supply of new general construction products in Australia using the Australian National Accounts: Input-Output Tables - Electronic Publication, 2007-08 Final (cat. no. 5209.0.55.001). ANZSIC 2006 class indexes at the State and Territory level are aggregated to the national level using proportions based on the value of work done by State and Territory and by type of construction as measured by the Building Activity, Australia (cat. no. 8752.0) for the 2010 and 2011 calendar years. The indexes generally use prices for work undertaken in each capital city, as construction activity in the city is taken to represent the whole State or Territory. For Queensland, however, other residential building construction and non-residential building construction also use prices obtained for North Queensland.
50 The products and weights for the price index of Input to the House construction industry were derived from reported quantities of each product used in selected representative houses in the three years ending 2002-03. The weighting pattern for each capital city index will reflect variations in prices for the cities as applied to an Australian average basket of house building materials, with some allowance for city specific building practices e.g. the differential use of steel and timber materials in Perth and Adelaide compared with the other capital cities. The weighting patterns for the price index of Input into the House construction industry are set out in Appendix 2 of the September quarter 2005 issue of this publication. Note that the weights shown are values based on the quantities of various materials used in house building over the three years ended 2002-03, valued at the September quarter 2005 prices.
MINING INDUSTRY PRODUCER PRICE INDEXES
51 The Mining industry index is available on the ABS website <http://www.abs.gov.au>. Table 11 presents the Input to the Coal mining industry price index. The valuation basis of this index is at purchasers' prices (see paragraphs 7-11) and, as far as possible, the prices included in the index are for products delivered to the mine site or to the primary storage area for a group of mines.
52 The products included in the indexes are reflective of all inputs into ANZSIC subdivision 06 - coal mining. The weights and products have been derived from the Australian National Accounts: Input-Output Tables - Electronic Publication, 2007-08 Final (cat. no. 5209.0.55.001).
SERVICES INDUSTRIES PRODUCER PRICE INDEXES
53 The Output of Services industries indexes are available on the ABS website <http://www.abs.gov.au>. Tables 20-27 present index numbers for selected Services industries classified to the following ANZSIC 2006 divisions: Accommodation and food Services industries, Transport, postal and warehousing industries, Information media and telecommunications industries, Rental, hiring and real estate Services industries, Professional, scientific and technical services industries, Administrative and support services industries, Public administration and safety industries and Other services industries. The valuation basis for each index is basic prices (see paragraphs 7-11). Prices used in the indexes relate to the amount received by the service provider.
54 The currently available Services industries indexes represent the results to date of a program to progressively extend the scope of the producer price indexes into the Services industries of the Australian economy. First results from the program were published in March 1999, by way of experimental indexes, in the Information Paper: Producer Price Index Developments, 1999 (cat. no. 6422.0). Similarly, changes to the indexes published from the September quarter 2009 on the ANZSIC 2006 basis have been documented in the Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002). Expanded coverage and improved indexes will be progressively implemented through the Services Producer Price Indexes Development program.
55 The Output of the Services industries price indexes measure changes in prices of Services classified to selected ANZSIC 2006 industries. Output price indexes for these industries are provided in Tables 20-27. Note that some ANZSIC 2006 industries do not yet have established indexes, and thus are not represented within these tables.
Products and weights
56 From the September quarter 2012, ANZSIC 2006 class indexes are aggregated to the relevant group, subdivision and division using weights derived from the Australian National Accounts: Input-Output Tables - Electronic Publication, 2007-08 Final (cat. no. 5209.0.55.001), in combination with data from other ABS surveys and industry sources. Prior to this, weights for these indexes were derived from the Australian National Accounts: Input-Output Tables - Electronic Publication, 2001-02 (cat. no. 5209.0.55.001).
57 The development of the Services industries price collections has involved a wide range of diverse industries with different measurement challenges. Accordingly, extensive consultation with industry associations and individual business establishments has been undertaken to determine the most viable approach, on a case-by-case basis.
58 Characteristics found within the Services industries of the Australian economy have complicated the task of price measurement.
59 The tendency within many industries to provide unique, one-off services tailored to the needs of individual customers has posed difficulties in establishing continuity of pricing to constant quality.
60 The 'bundling' of a range of different component services within one transaction or contract has required investigation of the feasibility of 'unbundling', that is, obtaining separate prices for each component of the total service. Where this has not proven to be feasible, the whole service bundle has been priced.
61 Provider business establishments are asked to report details of any discounts they offer so that actual transaction prices can be calculated. However, as discounts are sometimes negotiated between individual buyers and sellers in relation to particular transactions, identifying discounts has not always been straightforward.
62 The deregulation of some Services industries leads to structural changes and more complex pricing practices. To deal with this, samples are continually updated to incorporate new businesses and pricing methodologies are reviewed over time.
63 It is planned to make available indexes for the majority of remaining ANZSIC 2006 classes within the Services industries after they have been developed from experimental to production status. At such time these new indexes would contribute to the broader SOP indexes in this publication and associated outputs available on the ABS website <http://www.abs.gov.au>.
64 Index numbers for financial years are simple averages of the relevant quarterly index numbers.
65 Indexes for the price index of Input to the House construction industry are presented separately for each of the six state capital cities. These city indexes measure price movements over time for each city. They do not measure differences in price levels between cities.
ANALYSIS OF INDEX NUMBERS
66 Care should be exercised when interpreting quarter-to-quarter movements in the indexes as short-term movements do not necessarily indicate changes in trend.
67 Movements in indexes from one period to another can be expressed either as changes in 'index points' or as 'percentage changes'. The following example illustrates the method of calculating index points changes and percentage changes between any two periods:
December quarter 2013 103.0 (see Table 1)
less December quarter 2012 101.1 (see Table 1)
Change in index points 1.9
Percentage change 1.9/101.1 X 100 = 1.9% (see Table 2)
68 Tables 5, 6 and 7 provide analyses of the index points contribution which ANZSIC groups make to the SOP Final demand indexes, in total, and then separately for domestic and imported commodities. For example, in Table 5 petroleum refining and petroleum fuel manufacturing contributed 0.87 index points to the Final demand index number of 103.0 for the December quarter 2013 and -0.05 index points to the net change of 0.2 index points between the September 2013 and December 2013 quarters.
69 Tables 8 and 9 analyse the contributions to the Intermediate demand and Preliminary demand index numbers, respectively.
70 Further information on price index developments in the ABS is presented in the following publications:
Information Paper: Changes to Time Series Spreadsheets for Producer Price Indexes, Australia, Feb 2006 (cat. no. 6427.0.55.001)
Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002)
Information Paper: Review of the Producer and International Trade Price Indexes, 2011 (cat. no. 6427.0.55.003)
Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004)
Information Paper: Implementation of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.005)
Information Paper: Producer Price Indexes Weighting Patterns, 2012 (cat. no. 6427.0.55.006)
Information Paper: An Analytical Framework for Price Indexes in Australia, 1997 (cat. no. 6421.0)
Information Paper: Producer Price Index Developments, 1999 (cat. no. 6422.0)
Information Paper: Review of the Import Price Index and Export Price Index, Australia, 1999 (cat. no. 6424.0)
Information Paper: Price Indexes and The New Tax System, 2000 (cat. no. 6425.0)
Information Paper: The Introduction of Hedonics Price Indexes for Personal Computers, 2005 (cat. no. 6458.0)
Information Paper: Changes to the Weights of the Price Indexes for the Output of the General Construction Industry, 2008 (cat. no. 6406.0)
Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006, (Revision 1.0) (cat. no. 1292.0)
Information Paper: Update on ANZSIC 2006 Implementation, 2008 (cat. no. 1295.0.55.001)
71 Users may also wish to refer to the following related publications, and other data products that are available free of charge from the ABS website.
Consumer Price Index, Australia (cat. no. 6401.0)
Wage Price Index, Australia (cat. no. 6345.0)
Australian National Accounts: Input-Output Tables (cat. no. 5209.0)
Balance of Payments and International Investment Position, Australia (cat. no. 5302.0)
72 Current publications and other products released by the ABS are listed on the ABS website <http://www.abs.gov.au>. The ABS also issues a daily Release Advice on the website which details products to be released in the week ahead.
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