CHAPTER 1 : BACKGROUND
INTRODUCTION
1.1 The ABS has a long history of compiling and publishing price indexes that inform the community of price changes over time. A range of indexes is produced, including, the Consumer Price Index (CPI), Producer Price Indexes (PPIs), International Trade Price Indexes (ITPIs), Wage Price Indexes (WPIs), Residential Property Price Indexes (RPPIs) as well as a range of analytical indexes.
1.2 The PPIs measure the rate of change in the prices of goods and services bought and sold by producers and service providers. An output PPI measures the rate of change in the prices received by producers for their output. An input PPI measures the rate of change in the prices paid by producers for the goods and services they purchase.
1.3 The ABS has determined that the principal purpose of the PPIs and ITPIs is to measure inflation by industry to support the compilation of the Australian National Accounts and Balance of Payments. PPIs are used in the compilation of the Australian National Accounts to produce chain volume measures (CVMs). Gross Domestic Product (GDP), the headline statistic of the National Accounts, and its components are expressed as CVMs and are presented as dollar amounts to enable comparison across products and industries. The secondary purpose of the PPIs and ITPIs is to aid the monitoring of inflation and the understanding of the transmission of inflation throughout the economy.
1.4 Economic transactions are usually recorded as the value of the transaction. This value reflects the volume of the product produced or consumed multiplied by the price per unit of volume. These volumes and prices are indistinguishable in the observed transaction and therefore need to be separated. In economic statistics, volumes are typically derived by dividing an observed transaction value by a price index.
AN ASSESSMENT OF PPI COVERAGE
1.5 Prompted by structural change in the Australian economy and encouraged by both user demand and the recommendations of the International Monetary Fund, the ABS has implemented a strategy to address under-coverage.
International Monetary Fund’s Australia: Report on the Observance of Standards and Codes 2010 (ROSC report Australia 2010)
1.6 According to the ROSC report:
“The Report on the Observance of Standards and Codes (ROSC)—Data Module provides an evaluation of Australia’s macroeconomic statistics against the Special Data Dissemination Standard (SDDS) complemented by an assessment of data quality based on the International Monetary Fund’s (IMF) Data Quality Assessment Framework (DQAF) July 2003. The DQAF lays out internationally accepted practices in statistics, ranging from good governance in data–producing agencies to practices specific to datasets. The datasets covered in the ROSC report are national accounts, consumer and producer price indexes, government finance, monetary, and balance of payments and international investment position statistics (Endnote 3).
1.7 The most recent ROSC report by the IMF for Australia was published in 2010. The ROSC report on PPI coverage found that “The PPIs produced by the ABS cover the minimum requirements of manufacturing and mining and currently about 37 per cent of all services are covered (based on 2001–2002 Input–Output data) (Endnote 4)". The ROSC report Australia 2010 went on to recommend that the ABS “Examine the costs and benefits of producing the outstanding PPIs for services, taking into account the added value from the gain in coverage, the methodological and data issues that would arise from developing PPIs for each service industry, and user needs (Endnote 5)”. The ABS committed to accord this recommendation a high priority (Endnote 6).
REVIEW OF THE PRODUCER AND INTERNATIONAL TRADE PRICE INDEXES 2012
1.8 The ABS conducted an analysis of PPI coverage which is reported in the Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (Endnote 7). The current PPI coverage is determined by overlaying the 2008 System of National Accounts (2008 SNA) Input–Output (I–O) tables with currently available PPIs (Endnote 8).
1.9 The review noted the requirement to improve coverage of the 2008 SNA Input–Output framework by progressively developing new price indexes. The PPI Review also prioritised a selection of areas for action by the ABS.
1.10 A measure of the output of the retail trade industry was identified as a high priority within this development program. Refer to table 1.1 (Endnote 9) below.
TABLE 1.1 – Services Producer Price Indexes Priorities identified in the PPI Review
| Priority | Services PPI |
| 1 | Retail Trade Margins |
| 2 | Construction products |
| 3 | Information Media and Telecommunications products |
| 4 | Transport, Postal and Warehousing products |
| 5 | International Trade in Services |
PREVIOUS WORK BY THE ABS TO PRODUCE RTPIs
1.11 Between 2002 and 2007 the ABS conducted an experimental retail trade margins survey.
1.12 An experimental national quarterly price index was produced and published on 20 February 2007 in the information paper
Experimental Price Index for Retail Trade Margins, Australia, 2003 to 2006, ABS cat. no. 6402.0.
1.13 The experimental RTPI collection ceased in early 2008 due to budgetary constraints.
1.14 Following feedback from key stakeholders regarding the high priority of a RTPI, funding was made available in the 2009 Budget enabling the reinstatement of the index and supporting data collection.
1.15 Before proceeding with data collection and index production work for the new RTPI, the ABS reviewed the original RTPI program. The review of the original RTPI considered the concepts, methods, and data sources to support the production of a high quality, relevant, RTPI.
1.16 It became clear during the course of this review that operational costs and levels of provider burden associated with the original RTPI were high. This was primarily caused by the index methodology used. The experimental RTPIs were constructed as Fisher indexes
(Endnote 10).
1.17 Following a consideration of the various index compilation methods available, the ABS determined that the new RTPI would be constructed using a Lowe index formula with weights updated and indexes chained annually
(Endnote 11). The Lowe index formula was chosen as it is a variation of the Laspeyres formula which allows more flexibility in the use of weighting information.
1.18 Following the receipt of additional funding, work commenced on the reinstatement of the index in 2010.
ENDNOTES
3. IMF, Australia: Report on the Observance of Standards and Codes—Data Module – http://www.imf.org/external/pubs/ft/scr/2010/cr10343.pdf
4. Ibid, p88.5. Ibid, p22.6. The outcome of the 16th Series CPI Review was published in cat. no. 6469.0 on 6 December 2010.7. Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012, cat. no. 6427.0.55.004. ch 4, [4.8] – [4.13]; and Appendix 2.8. Ibid. ch 4, [4.8].9. cat.no. 6247.0.55.004, [4.9], Table 4.1 10. The detailed criteria used to select an index type can be found in the Information Paper, Consumer Price Index: Concepts, Sources and Methods, cat. no. 6461.0. In summary, all index types possess characteristics that make each of them more or less desirable in certain circumstances. For example, the Paasche type index benefits from an up-to-date weighting structure but suffers from an inability to produce results in a cost effective and timely manner. The Fisher index possesses several theoretically desirable characteristics (like factor reversal and time reversal) but is considered difficult to produce in a timely and cost effective manner due to its use of the Paasche index. The Laspeyres type index can be produced in a timely and cost effective manner. The main theoretical concern is that the Laspeyres type index can suffer from not having an up-to-date weighting structure. This can be overcome by frequently updating the weights, for example - annually.11. Chapter 3 of this paper provides detailed methodological information to compile the RTPI
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