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22 In concept the valuation basis of the SOP indexes is basic prices (see paragraphs 5-9). However, the use of component series from existing ABS price collections in some cases results in the pricing basis diverging from this ideal. For example, imports are priced on a 'free-on-board' (f.o.b) basis, not 'cost, insurance, freight' (c.i.f), which approximates basic prices.
The SOP concept
23 The indexes are compiled using the SOP concept. Under this concept flows of commodities are categorised according to their economic destination on a sequential basis along the production chain. The basis for the categorisation is the Australian input-output tables (1996-97). The primary categorisation is between final commodities (i.e. commodities destined for final consumption, capital formation or export) and non-final commodities (i.e. commodities that flow into intermediate consumption for further processing).
24 This initial breakdown of the commodity flows into final and non-final represents a useful economic dissection of producers' transactions. However, the non-final commodities can flow into the production of both final and other non-final commodities. Therefore, to aid analysis, the non-final commodity flows have been divided on a sequential basis between Stage 1 (or preliminary) commodities and Stage 2 (or intermediate) commodities as illustrated below. This approach results in three separate stages of production.
25 The three stages are not aggregated in order to avoid the potential distorting effects that may result from multiple counting of changes in transaction prices as commodities flow through different production processes.
26 Under this framework, preliminary (Stage 1) commodities are used in the production of intermediate (Stage 2) commodities; in turn intermediate (Stage 2) commodities flow into the production of final (Stage 3) commodities.
27 The framework allows for analyses of price change as commodities flow through production processes. Price changes for earlier stages of production may be indicators of possible future price changes for later stages.
Transaction flow approach
28 The ABS has adopted a transaction flow approach in disaggregating commodity supply into the various production stages. This approach means that the assignment of a commodity to a stage is based on the proximity of its use in final demand.
29 Alternative degree of fabrication or principal destination approaches are employed by statistical agencies in some other countries. These approaches result in the allocation of particular commodities to one, and only one, stage. This would present particular problems for Australia due to the openness of the economy, with exports (and imports) equivalent to about 20% of gross domestic product. Commodities such as wheat, wool, and iron ore are exported in large volumes as well as being further processed locally. The allocation of such commodities to a single stage would be very arbitrary by necessity.
30 Adopting the transaction flow approach means, for example, that exported wheat and domestically used wheat are treated as different commodities for index construction purposes. Under this approach commodities transactions can be allocated to more than one stage. Exported wheat is treated as a final (Stage 3) commodity while wheat used domestically to make the flour used in bread production is considered to be a preliminary (Stage 1) commodity. Similarly, commodities such as energy and containers appear under all three categories.
Scope and coverage
31 Producer price indexes conventionally relate to the output primary to domestic industries, at basic prices, either inclusive or exclusive of exports. As the main focus is on domestic inflation, exports are excluded from the headline SOP series 'Final (Stage 3) commodities', as presented in the key figures on the front page and in tables 1-6. Index series for Final (Stage 3) commodities including exports are available in tables 24 and 25.
32 Imports have also been incorporated within the framework, recognising that they represent an important potential source of inflationary pressure.
33 In concept, the SOP indexes incorporate all flows of goods and services. However, currently there is limited coverage of service industries and the construction industry by the producer price indexes (see sections on construction industry and service industries producer price indexes below).
34 Price indexes for most Transport and storage services (Division I of ANZSIC 1993) and Property and business services (Division L of ANZSIC 1993) industries have been included in the SOP framework. However, price series for most Final (Stage 3) consumer services are not currently available on a sufficiently timely basis to allow their inclusion in the indexes. This has the effect of decreasing the relative weight of consumer items versus capital items in the final stage. It is intended to introduce additional services price series as they become available, along with the consequential weight changes.
35 Index coverage for the construction industry (Division E of ANZSIC 1993) is currently limited to the outputs primary to the following ANZSIC 1993 classes:
36 As with services, it is intended to introduce further construction price series as they become available.
Items and weights
37 The items included in the indexes reflect the values of commodity flows, for both domestic supply and imports, allocated to stages based on an analysis of detailed 1996-97 input-output tables. The index structures and weighting patterns for the SOP indexes are shown in the Appendix of the December quarter 2002 issue of this publication.
Comparisons with the Consumer Price Index
38 Final (Stage 3) indexes are presented for consumer commodities. It should be noted that this index is not directly comparable with the Consumer Price Index (CPI). The two indexes differ significantly in concept and coverage. The major differences are:
MANUFACTURING INDUSTRY PRODUCER PRICE INDEXES
39 The manufacturing output producer price indexes relate to selected products (i.e. articles produced) primary to the manufacturing industry, while the manufacturing input producer price indexes relate to materials used by establishments classified to the manufacturing industry. They are important sources of data for the SOP indexes.
40 The manufacturing industry series are available on the ABS website <http://www.abs.gov.au>. Tables 10 and 11 present the Price Indexes of Articles Produced by Manufacturing Industries and tables 12-14 present the Price Indexes of Materials Used in Manufacturing Industries. Basic prices are used for the output index and purchasers' prices for the input index (see paragraphs 5-9). Therefore, as far as possible, ex-factory prices are included in the output index. Delivered into factory prices are included in the input index.
41 Table 30 presents Price Indexes of Copper Materials used in the manufacture of electrical equipment.
42 The reference base for all of the ANZSIC 2006 classified manufacturing output and input indexes linked to previous ANZSIC 1993 classified indexes is 1989-90 = 100.0. The reference base for new manufacturing output and input indexes, introduced as part of the ANZSIC 2006 implementation in the September quarter 2009, is 2001-02 = 100.0. (Further information relating to the reference bases is presented in the Appendix to the March quarter 2009 issue of this publication).
43 Prior to the September quarter 2009, the manufacturing indexes were constructed on a net sector basis with intra-sector transactions netted out. The scope of the output indexes was therefore restricted to transactions in produced articles primary to the defined sector of the Australian manufacturing industry that were sold or transferred to domestic establishments outside that sector, or used as capital equipment, or exported. The scope of the input indexes related to transactions in materials used in defined sectors of the Australian manufacturing industry that were produced by domestic establishments outside that sector, or imported.
44 From the September quarter 2009, the manufacturing indexes are constructed on a gross sector basis. The scope of the output indexes includes transactions in produced articles primary to the defined sector of Australian manufacturing industries that are sold or transferred to domestic establishments within or outside that sector for further processing, or used as capital equipment, or exported. Articles are defined as all products primary to the manufacturing industry excluding commission production products and general government consumption of fixed capital. The scope of the input indexes relates to transactions in materials used by establishments classified to the manufacturing industry. Materials are defined as products primary to ANZSIC 2006 Divisions A - D (ie agriculture, forestry, fishing, mining, manufacturing and electricity, gas, water and waste services) that are consumed by establishments classified to the manufacturing industry.
45 An advantage of the net sector approach over the gross sector approach was that it avoided the potential distorting effects that may have resulted from multiple counting of changes in transaction prices as commodities flow through different production processes. However, although conceptually valid, the exclusion of the internal intermediate transactions from the net sector manufacturing division indexes resulted in incomplete coverage of the targeted sector of the economy. Prior to the September quarter 2009, in order to increase coverage, while still avoiding the multiple counting issue, independent net sector measures were constructed for articles primary to manufacturing subdivisions and groups on an ANZSIC 1993 basis. While having intermediate transactions between different manufacturers within a given subdivision or group netted out, intermediate transactions with manufacturers in other subdivisions/groups were in-scope.
46 Following further analysis and discussions with key users of the indexes, the ABS has determined that the potential for distortion from multiple counting of changes in transaction prices is low. An advantage of the gross sector approach is improved coverage of transactions primary to the targeted sector of the economy. Intermediate transactions between manufacturers in other ANZSIC subdivisions or groups and transactions between different manufacturers within the same ANZSIC subdivision or group are in-scope. The change in concept from net to gross sector is not expected to have a material impact, as the same influences affect prices whether transactions occur within or outside the manufacturing industry.
47 The gross sector approach is more appropriate for use alongside the SOP framework. Conceptually, the SOP indexes are economy-wide relating to transactions primary to all the goods and services industries, and the gross sector approach is more consistent with the system of national accounts.
48 The manufacturing division output index (table 10), from the September quarter 2009 onwards, measures changes in prices of articles that are primary to ANZSIC 2006 Division C - Manufacturing, that are sold or transferred to domestic establishments within or outside the manufacturing division for further processing, intermediate use or used as capital equipment or exported. Prior to the September quarter 2009 this index was constructed on a net sector basis (see paragraphs 43-47 above).
49 Similarly, the output indexes for articles primary to manufacturing subdivisions and groups (table 11) 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 produced articles primary to the specific manufacturing subdivision or group that were sold or transferred within that subdivision or group for further processing.
50 The manufacturing division input index (tables 12 and 13), from the September quarter 2009 onwards, measures changes in prices of materials used in ANZSIC 2006 Division C - Manufacturing, that have been purchased or transferred in from domestic establishments within or outside the manufacturing division, or imported. Prior to the September quarter 2009 this index was constructed on a net sector basis (see paragraphs 43-47 above).
51 Similarly, the input indexes for materials used in manufacturing subdivisions and groups (table 14) measure input purchases or transfers within and outside the subdivision or group. Prior to the September quarter 2009 these indexes were constructed on a net sector basis. They excluded intermediate transactions in materials used in a specific manufacturing subdivision or group that were sold or transferred within that subdivision or group for further processing.
Items and weights
52 From the September quarter 2009, the items included in the manufacturing indexes reflect the values of articles produced and materials used based on an analysis of detailed 2001-02 input-output tables.
53 The index structures and weighting patterns for the manufacturing input and output division indexes are shown in Appendix 1 of Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002). Index structures and weighting patterns for the associated ANZSIC subdivisions and groups are available from the ABS website <http://www.abs.gov.au> as data cubes in that information paper (cat. no. 6427.0.55.002).
CONSTRUCTION INDUSTRY PRODUCER PRICE INDEXES
54 The construction producer price indexes relate to outputs primary to ANZSIC 2006 Division E. The House building (i.e. material used) input index relates to products used by establishments classified to ANZSIC 2006 Division E. These indexes are important sources of data for the SOP index.
55 The construction industry series are available on the ABS website <http://www.abs.gov.au>. Table 15 presents the Price index of the outputs that are primary to the building construction subdivision and selected construction industry classes. Tables 16 and 17 present the price index of Materials used in house building. The pricing basis is basic prices for the output indexes and purchasers' prices for the input index (see paragraphs 5-9 above). Therefore, as far as possible, builders' selling prices are reflected in the output index, and delivered on site prices are reflected in the input index.
56 Table 31 presents the price indexes for Asphalt supply and Asphalt placed for the weighted average of six capital cities. These indexes measure changes in the price of the supply, delivery and placement of selected grades of asphaltic concrete used in road construction in capital city statistical divisions. As far as possible, actual transaction prices are used in this index.
57 The output indexes are calculated on the reference base 1998-99=100.0 and the input indexes on the reference base 1989-90=100.0.
58 The construction outputs price indexes (table 15) measure changes in prices of the outputs primary to selected construction industry classes. Presented in this table is the ANZSIC 2006 Subdivision (30) - Building construction which consists of three classes: House construction (3011); Other residential building construction (3019); and Non-residential building construction (3020). Outputs primary to the class Road and bridge construction (3101) are also presented in this table.
59 The construction input indexes (tables 16 and 17) measure changes in prices of Materials used in house building, where a house is defined as a detached building predominantly used for long-term residential purposes and consisting of only one dwelling unit. ANZSIC class House construction (3011) approximates the industry scope of the index.
60 The input index does not explicitly cover alterations, additions, renovations and repairs. It relates to the statistical division for each State capital city.
Items and weights
61 ANZSIC 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 as measured in input-output statistics. ANZSIC 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 type of construction as measured by ABS building and construction activity statistics. From the December quarter 2007 index numbers have been calculated using an updated weighting pattern in which input-output values for 2001-02 have replaced 1996-97 values and new State and Territory activity proportions have been derived from the two calendar years 2005 and 2006 to replace previous proportions derived from a 5 year average of the years 1994-95 to 1998-99. 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.
62 The items and weights for the price index of Materials used in house building were derived from reported quantities of each material 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 Materials used in house building 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 3 years ended 2002-03, valued at the September quarter 2005 prices.
MINING INDUSTRY PRODUCER PRICE INDEXES
63 The mining industry series are available on the ABS website <http://www.abs.gov.au>. Table 18 presents Price Indexes of Materials used in coal mining. The pricing basis of the index is purchasers' prices (see paragraphs 5-9) and, as far as possible, the prices included in the index are for items delivered to the mine site or to the primary storage area for a group of mines.
64 The items included in the indexes reflect the value of materials used in the operation of open cut and underground coal mines in Australia during 1999-2000. The index structures and weighting patterns are available on request.
65 The indexes are calculated on the reference base 1989-90=100.0.
SERVICE INDUSTRIES PRODUCER PRICE INDEXES
66 The service industry series are available on the ABS website <http://www.abs.gov.au>. Tables 19-23 present index numbers for selected services primary to the following ANZSIC 2006 divisions; Division I - Transport, postal and warehousing; Division J - Information media and telecommunications; Division L - Rental, hiring and real estate services; Division M - Professional, scientific and technical services; Division N - Administrative and support services; Division O - Public administration and safety and Division S - Other services. The pricing basis of each index is basic prices (see paragraphs 5-9). Prices used in the index relate to the amount received by the service provider. These indexes are important sources of data for the SOP indexes. The original index numbers are calculated on the reference base 1998-99=100.0. New indexes created as part of the implementation of ANZSIC 2006 in the September quarter 2009 have been backcast to September 2001. These index numbers are calculated on the reference base 2001-02=100.0.
67 The currently available service industry indexes represent the results to date of a program to progressively extend the scope of the producer price indexes into the service sectors of the economy. First results from the program were published in March 1999, by way of experimental indexes, in 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 Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002).
68 The service industry series measure changes in prices of services primarily defined to selected ANZSIC 2006 industries, excluding general government consumption of fixed capital. Selected output for these industries is provided in tables 19-23. Note that some ANZSIC classes do not yet have established indexes, and thus are not represented within these tables.
Items and weights
69 From the September quarter 2009, ANZSIC 2006 class indexes are aggregated to the relevant group, subdivision and division using weights derived from 2001-02 input-output domestic production values, in combination with data from other ABS surveys and industry sources. Prior to this weights for these series on an ANZSIC 1993 basis were derived from 1996-97 input-output values.
70 The development of the services price collections has involved a wide range of diverse industries with different measurement problems. Accordingly, extensive consultation with industry associations and individual businesses has been undertaken to determine the most viable approach, on a case-by-case basis.
71 Characteristics found within the services sector of the economy have complicated the task of price measurement.
72 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.
73 The 'bundling' of a range of different component services within the one transaction or contract has required investigation of the feasibility of 'unbundling', that is, obtaining separate prices for each of the components of the total service. Where this has not proven to be feasible, the whole service bundle has been priced in total.
74 Respondent businesses are asked to report details of any discounts they offer so that actual transactions 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.
75 The deregulation of some service 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.
76 It is planned to make available indexes for the majority of remaining ANZSIC 2006 classes within the services divisions 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>.
77 Index numbers for financial years are simple averages of the relevant quarterly index numbers.
78 Indexes for the price index of Materials used in house building 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 CHANGES
79 Care should be exercised when interpreting quarter-to-quarter movements in the indexes as short-term movements do not necessarily indicate changes in trend.
80 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:
Stage of Production: Total Final commodities index numbers
June quarter 2010 135.2 (see table 1)
less June quarter 2009 133.9 (see table 1)
Change in index points 1.3
Percentage change 1.3/133.9 x 100 = 1.0% (see table 2)
81 Tables 5, 6 and 7 provide analyses of the index points contribution which ANZSIC groups make to the stage of production final commodities indexes, in total, and then separately for domestic and imported commodities. For example, in table 5 petroleum refining contributed 4.18 index points to the Total Final commodities index number of 140.7 for the March quarter 2012 and 0.02 index points to the net change of -0.4 index points between the December 2011 and March 2012 quarters.
82 Tables 8 and 9 analyse the contributions to the intermediate and preliminary commodities index numbers, respectively.
83 Further information on recent price index developments in the ABS is presented in the following publications:
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: 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, Australia, 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, Australia, 2008 (cat. no. 1295.0.55.001)
Information Paper: Update on ANZSIC 2006 Implementation for Producer and International Trade Price Indexes, Australia, 2009 (cat. no. 6427.0.55.002)
84 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)
Labour 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)
85 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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