6429.0 - Producer and International Trade Price Indexes: Concepts, Sources and Methods, 2014  
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CHAPTER 8 PRICE COLLECTION


INTRODUCTION

8.1 This chapter describes the data collection processes in use for the Australian Producer Price Indexes (PPIs) and International Trade Price Indexes (ITPIs). It also describes the relationship to both sample selection (Chapter 7) and sample maintenance (Chapter 11), and the common issues encountered in measuring prices for a wide range of products. More detailed descriptions of product-specific pricing issues are provided in Chapter 13.

8.2 The Australian Bureau of Statistics (ABS) acknowledges the burden the Survey of Producer Prices (the collection vehicle for the PPIs and ITPIs) places on data providers and minimises this burden by tailoring survey forms to each provider and regularly reviewing the size and composition of the survey’s sample.

8.3 The ABS meets the confidentiality requirements of the Census and Statistics Act by ensuring that information provided to the ABS is:

  • securely maintained
  • only used for statistical purposes
  • published statistics do not enable the identification of an individual or business
  • microdata files are confidentialised to support research and analysis.

Further information on how the ABS keeps information confidential is available in Survey Participant Information - How The ABS Keeps Your Information Confidential.

8.4 The Survey of Producer Prices collects pricing data, reasons for price movements, and details regarding changes in product characteristics. Enrolment into the survey requires additional information regarding sales data, purchasing information to gauge representativeness and contact details for persons responsible for pricing information.

8.5 Information regarding a transaction is collected to ensure that the price captured is on the correct pricing basis for the index concerned. Collection of additional information, or collecting data on a different pricing basis, allows the pricing data to be used in multiple ways. This re-use of price data is considered a mechanism whereby the ABS maximises the utility of collected pricing data. The PPIs and ITPIs may re-use pricing data for equivalent components for price indexes with similar pricing bases. For example, the beef component of the Export Price Index (EPI) is used to move the exported beef component of the Output of the Manufacturing Industries Price Index. This practice has an implicit assumption that transport costs from producer to ship move proportionally with the export free on board (f.o.b.) price.


TIMING AND FREQUENCY OF PRICE COLLECTION

8.6 The principle purpose of the PPIs and ITPIs is to support the compilation of the quarterly Australian National Accounts and Balance of Payments. As described in Chapter 2, price indexes are used as deflators in the preparation of the Australian National Accounts, particularly in the production of chain volume measures. To meet this key requirement, Australian PPIs and ITPIs are compiled on a quarterly basis, with the purpose of measuring average quarterly price change.

8.7 Most individual products priced in the PPIs and ITPIs are priced once per quarter, using a point-in-time pricing mechanism. However, pricing occurs more frequently for products that exhibit volatile price behaviour. In such cases, collections are carried out monthly or even more frequently (for example, a series of crude oil prices is collected daily).

8.8 The usual practice is to collect prices from all providers in each pricing period. However, there may be some cases where prices are generally stable, products take a long time to produce, or price changes happen at predetermined times. In these cases it is not necessary to collect prices in every reference period.

8.9 Point-in-time prices relate to the price of a product on a particular day of the period (for example, the first day of the month, the nearest trading day to the fifteenth day of the month, middle day of the quarter). This approach makes the collection date straightforward for both the ABS and providers and means that comparisons from period to period will be consistent.

8.10 To mitigate short-term external influences (for example, extreme weather, labour stoppages, seasonality), the ABS spreads the pricing points for all providers to different positions over the 13 weeks of the reference quarter. This approach ensures the price of a particular product is observed at more than one point in time during the pricing period.


THE PRICE OBSERVATION

8.11 A price observation is the price of a specific product at a given point in time. To ensure consistency in the final index, a price observation should compare “like with like” in each different collection period. Product specifications are defined as tightly as possible so that the prices collected for a particular product can be compared from period to period and any changes in product specification characteristics (quality) can be identified. The main criteria that form part of a specification are listed in Table 8.1 below:

Table 8.1 ITEMS TO BE INCLUDED IN THE CREATION OF A SPECIFICATION

ITEM DETAIL

Product name & serial number Company's name for the product within the specified product group. This should contain information about the model/variety of product.
Description In addition to the product name, this gives an opportunity for the company to specify what (if any) enhancements or add-ons are included in the product. For example, with cars, a number of options are usually available (metallic paint, air conditioning, sun-roof), all of which affect the utility of the product.
Size of transaction (quantity data) The amount (quantity) of product sold, and whether volume discounts apply.
Class of Customer Some companies may have different pricing structures for different customers (for example, trade discounts). A unique customer identifier can be used for customer confidentiality.
Units of sale Units used in describing the product (for example, kilograms or litres).
Discounts Many companies offer trade, volume, competitive, or preferred customer discounts. All applicable discounts should be described.
Transport terms Whether transport costs are included and a description of how the products will be collected or delivered.
Currency Currency the transaction will be traded in.



8.12 The details in table 8.1 combine to produce a clear description of the product specification. Describing a specification in this way also assists the adjustment of the price associated with any changes in the product quality or the terms and condition of sale (see Chapter 9).

8.13 For some industries, a specification for a particular product may not be appropriate. For example, some industries produce products on a made-to-order basis or a one-off basis, and the same product is not produced in successive periods. Examples of such products include ships, buildings, and many business services. In these instances, a model specification may be more appropriate. This would be a specification, as described previously, but for a representative group of products, rather than for a specific product.


TRANSACTION PRICES

8.14 A transaction price is the value placed on an item (agreed upon by seller and buyer) at the point of transaction. It must reflect the actual prices paid to or received from producers after taking into account all discounts applied to the transaction whether they be volume discounts, settlement discounts or competitive price cutting discounts which are likely to fluctuate with market conditions.

8.15 PPIs and ITPIs attempt to measure actual transaction prices for the exchange of products. The price includes the impact of all discounts, surcharges, rebates, etc. for a unique customer or unique class of customer. It is not always possible to obtain a transaction price net of all discounts and inclusive of all surcharges. Care is taken to secure a type of price with a movement which closely proxies actual transaction prices.


Contract prices

8.16 Contract pricing generally refers to a written sales instrument that specifies both the price and shipment terms. The contract may include arrangements for a single shipment or multiple shipments. The contract usually covers a period in excess of one quarter. Contracts are often unique in that not all the price-determining characteristics in one contract can be expected to be repeated exactly in any other contract. The challenge is to maintain a constant quality over time, especially when the contract expires and selection of a replacement product is necessary.

8.17 Contract terms may be unique to each agreement in terms of customised product features, negotiated price tied to the unique buyer/seller relationship, or quantity differences. In addition, contracts reflect supply and demand conditions at the time of entering into the contract.

8.18 To maintain an accurate index where contract pricing is widespread, the ABS employs larger samples. This is to reflect the proper proportion of new contracts or renegotiated contracts being entered into in each pricing period.


Spot market prices

8.19 Spot market price (or simply spot price) may be defined as any short-term sales agreement. Generally, this refers to single-shipment orders with delivery expected in less than one month. Products sold on this basis are usually off-the-shelf and, therefore, are not subject to any customisation. These prices may be subject to discounting and directly reflect current market conditions. Spot market prices can be extremely volatile; in the case where this volatility is not experienced in actual transactions, the ABS adopts pricing methodologies that minimise this spot price volatility. For example, for crude petroleum oils, the ABS incorporates an average of daily prices into the price measurement for each period. Another solution the ABS adopts for homogeneous products that exhibit price volatility is to use average unit values.


Average unit values

8.20 Average unit values (or simply average prices) reflect multiple shipments of a given product within a consistently defined period, for which data are usually readily available. The advantage of average unit values is that they effectively increase the number of price observations used to calculate the index, thereby reducing sample variance. The reduction in variance is achieved because average unit values explicitly represent the entire population of transactions for a particular product, and so the concern when pricing a handful of single transactions does not apply. An average unit value does not take into account constant quality and is therefore used selectively.


Counterpart pricing

8.21 Counterpart pricing is a term to reflect utilisation of a transaction price observed on a pricing basis that differs from the conceptual basis of the price index. For example, consider an input price index that measures the price of plumbing products purchased by builders for use in house construction. The conceptual basis for such a price index is to measure the purchasers’ price paid by the builder, inclusive of delivery charges. A counterpart price for this transaction would be the price received by the producer of the plumbing products; that is, the basic price. This basic price would differ from that paid by the builder in this case due to delivery costs. A counterpart pricing methodology is employed whenever a purchaser’s price is represented by a basic price, or vice versa.

8.22 Note that the use of a counterpart pricing methodology has the implicit assumption that transport and distributive trade margins move proportionally with the basic price.
WHEN IS A TRANSACTION PRICE DETERMINED?

8.23 The appropriate price to obtain from a theoretical perspective should be the price at the time there is a change in ownership from the producer to the buyer. Unfortunately, it is frequently difficult to adhere to this theoretical requirement uniformly in practice. Therefore, the ABS generally uses the concept of shipment price for the actual transaction occurring as close to the survey pricing date as possible. In most circumstances, the shipment price is final at the time of delivery to the customer. An important caveat is made for the Import Price Index in this case.


Import Price Index and imports into Australia

8.24 The Import Price Index (IPI) measures the price of merchandise that is imported into Australia. A transaction is in scope of the IPI if the merchandise crosses the Australian customs frontier during the reference period. However, that transaction, and hence the change of ownership, may have occurred prior to the reference period, with the difference in timing due to shipping times. For example, a shipment of cars may change ownership during the last week in March, but not arrive in Australia until early in April. In this instance, although the change of ownership occurred in the March quarter, the price measurement would be included in the June quarter IPI.

8.25 This crossing customs frontier basis is the same as that adopted for Australian International Merchandise Trade statistics. It slightly differs from the conceptual bases of both the Australian National Accounts and Balance of Payments statistics. However, since both the Australian National Accounts and Balance of Payments data use international trade data as a source, the data sets are consistent in practice. Adjustments for timing are made to the Australian National Accounts or Balance of Payments in the case of large one-off purchases, typically of capital goods (for example, the purchase of a fleet of jet aircraft). Since by its very nature the IPI cannot determine a price movement for one-off purchases, the IPI is consistent with the compilation of both the Australian National Accounts and Australian Balance of Payments statistics.


DISCOUNTS

8.26 The identification of discounts is complicated in practice by a number of factors.
  • The pricing structure used by the company may be complex and the conditions under which discounts apply may be described in non-standard terms
  • Differences in pricing and discounting procedures between companies require data collection to be tailored to each company
  • The full level of discounts offered to major customers may only be known to senior company officials.

8.27 In clearly identifying discounts, it is convenient to classify the discounts into two categories: recurring discounts, and non-recurring discounts.

8.28 Recurring discounts generally reflect cost savings to the buyer and are generally on-going, recurring every time a sale is made that meets specified conditions. The most common types of discounts fall into this category (e.g. discounts based on type of customer, volume discounts, settlement discounts).

8.29 Non-recurring discounts are discounts that reflect the bargaining power of the buyer vis-a-vis the seller and/or current market conditions. This category includes various forms of competitive discounts (including those that appear in the guise of short-term changes to specific classes of customer and other recurring discounts).

8.30 Discounts are frequently commercially sensitive information. For example, knowledge of competitors’ discounts with major customers (or major suppliers) is of enormous commercial value; in other cases such information may have significant public relations or political impacts.

8.31 Examples of discounting practises are:
  • Competitive discounts reflecting unique supply or demand conditions, generally in specific markets for the product. These discounts are generally of short duration in any specific market area, but may be applicable in at least one market area on a frequent basis
  • Surcharges are additions to the listed price. These are generally of short duration and reflect unusual cost pressures affecting the manufacturer (for example, fuel surcharges for road freight companies)
  • Prompt payment discount for remitting payment within a fixed period such as ten days. These discounts are generally of small magnitude, remain unchanged for long periods, and are available to all customers
  • Volume discounts are generally tied to specific order sizes and increase the larger the order. These discounts are generally available to all customers
  • Class of customer discounts are specific to certain classes of buyer. Trade discounts are available to wholesalers to help cover their selling expenses. Advertising discounts are available to retailers to help cover their promotional expenses. These tend to be expressed as percentages and remain unchanged for long periods
  • Financing discounts relate to providing assistance to customers to pay for the products they are purchasing. They may serve as a buy-down on the bank loan interest rate for those customers borrowing to pay for the product
  • Cumulative volume discounts are offered to customers who purchase a certain amount of a product in units or sales in several shipments over a specific period.

8.32 The use of a personal interview (see Chapter 11) and subsequent design of the questions in the Survey of Producer Prices allows the ABS to determine the current and likely future use of the discount practises described above, and to emphasise the importance of notifying the ABS of any change in, or future use of discounts (including non-recurring discounts).

8.33 Operational procedures for processing the Survey of Producer Prices, especially data editing and querying of providers, also focus on identifying changes in discounts and pricing policies.

8.34 There are a number of additional sources of information that are useful in revealing the existence of (or changes to) discounts:
  • Media reports - discounting of major products or product types are often subject to media commentary. Further, media coverage of annual reports and meetings often reveal the existence of competitive price discounting ( for example, a price war)
  • Market intelligence - gathered from ABS subject matter experts, industry associations and other Australian Government departments
  • Confrontation of price data across other providers - it is a rare situation for a provider to set prices (and discounts) independent of competing providers. Differences in price levels (or in price movements) may indicate unreported discounts. Care must be used here to identify price-leaders in these circumstances, as discounts from competitors may occur in earlier or later periods.

8.35 In the case of volume discounts, the same customer may face varying prices for the same product purchased in consecutive periods, because different volumes are purchased in the two periods. In circumstances such as this, the unit price will vary simply because the volume of sales has changed rather than because of a change in the underlying price of the product. If it is determined that this is a typical occurrence for a particular product, the specification of the item will usually identify a certain volume for pricing purposes. That volume is then priced in each pricing period.

8.36 Also related to volume discounting is the common occurrence of providing a larger quantity of the product for the same price, sometimes for a limited period. Again, to ensure that price changes are correctly included in the price index, quantity details are also collected.

8.37 The overarching principle in the ongoing identification of discounts so that they may be correctly included in the final transaction price, is to record list price and discount as separate data items. In this manner, it is far more likely that a change in discount is correctly observed in calculation of the final transaction price.


REBATES

8.38 A rebate is a type of discount where the discount is paid after the purchase and is normally based on the cumulative value of purchases over a specified time.

8.39 Rebates in price indexes pose major practical problems in that they are often determined by future events. For example, the buyer receives a rebate at the end of the financial year based on how much was purchased in the year. Thus, at the start of the year, while it is known that the buyer will receive a rebate, the precise amount is unknown. The particular problem posed by rebates of this sort is that the final price to be paid will not be known until after the end of the period concerned. This type of rebate is often referred to as a retrospective price fall.

8.40 The situation is often further complicated by the rebate being paid to the buyer in the form of a reduction in the cost of their purchase in a particular period. That is, the total rebate for all purchases in a previous year is applied to the price of purchases in a particular period. This practice results in a large price fall in the period in which it is applied.

8.41 Where the rebate is already in existence the rebate should be treated as a discount and deducted from the quarterly price, and not treated as retrospective price reductions. The basis for calculating the rebate should be the buyer's normal volume of purchases (if the buyer is a new customer then the basis for calculating the rebate should be the average quantity purchased by that category of buyer).

8.42 Changes in the level of rebates should only be reflected where the actual rebate for the same quantity purchased or sold changes. Changes in the rebates paid to a particular customer due to the customer changing their volume of purchases should not be reflected as price changes.

8.43 The rebate collected should be the rebate applicable to constant quantity and clearly detailed in the pricing specification.

8.44 Where rebates are specified in terms of monetary value of purchases it is important to realise that due to inflation, a monetary value does not represent a constant real quantity. As per the discussion above for discounts, any monetary values should be converted to quantity data.

8.45 If the quantity of a provider's sales changes significantly, the pricing specification should be changed to reflect this. The change in rebate associated with a change in volume should not affect the index.

8.46 Where a number of levels of rebates are offered it is necessary to ascertain the importance of each level of rebate and to price those that are significant.

8.47 On occasions rebates will be introduced retrospectively, that is a supplier introduces rebates based on a previous financial year’s purchases. Two types of practises arise here. The first practise is where prices for previous periods are amended prior to settlement. The second practise is where prices for a particular subsequent period are themselves amended to reflect price changes for earlier periods.

8.48 Example: consider a manufacturer of steel shelving who purchases sheets of stainless steel as a material input. This particular producer is offered a rebate of 5% if he buys more than 2000 tonnes in a calendar year. His purchasing data appear as follows:

Example: Purchases of stainless steel

Reference Period
Price
Quantity
Value
% change in price from previous quarter
Year 1(T)
$ per tonne
tonnes
$'000
%

Quarter 1
380
570
216.6
Quarter 2
420
590
247.8
10.5
Quarter 3
460
560
257.6
9.5
Quarter 4
510
590
300.9
10.9
Total
2 310
1 022.9



The producer exceeds 2000 tonnes purchased within the calendar year, and his supplier provides a 5% rebate for the year's purchases. This amounts to 5% of $1.0229 million dollars, or $51,145. The supplier provides this rebate by deducting this value from the quarter 1 of Year 2's total purchases.

Reference Period
Price
Quantity
Value
% change
in price from
previous quarter
Year 2 (T+1)
$ per tonne
tonnes
$'000
%

Quarter 1
560
660
369.6
Quarter 1 (with rebate)
318,455/660 = 482.5
660
369.6-51.145 = 318.455
-5.4
Quarter 2
610
660
402.6
26.4



In the Australian PPIs and ITPIs the rebate is shown in the quarter in which it is applied, resulting in a substantial price fall in quarter 1 of Year 2 and substantial offsetting price rise in quarter 2 of Year 2.

8.49 There are two reasons for this practice, stemming from the concept that the indexes measure the prices applying in a particular quarter:
  • With regards to inflation and decision making, the prices applying in quarter 1 of Year 2 were those used in the index; that is, businesses were making decisions based on those prices and charging their buyers based on these prices (or equivalently improving margins for this quarter)
  • With regards to use in the production of quarterly Australian National Accounts, both the revenue data and expenditure data used in the compilation of the Australian National Accounts use the value data represented above. As the aim of the Australian National Accounts is to show change in volumes (quantities), the price data for quarter 1 of Year 2 must show a price fall commensurate with the payment of the rebate; failure to do so would result in a (false) fall in volumes in the Australian National Accounts. The correcting price rise in quarter 2 of Year 2 must similarly occur so as not to cause a false rise in volumes.
UNIQUE PRODUCTS

8.50 A unique product is a product that is only manufactured once to the specification of a customer. Within a group of products, each product will be different from the others, for example, industrial furnaces, ships and architectural services. In these cases, the price cannot be observed over future reporting periods.

8.51 The solution to this problem is based on the concept that products are a collection or bundle of different characteristics. For example, a ship can be considered as consisting of steel, engine components, navigational equipment, and so forth; an architectural service may consist of different numbers of hours of senior and junior architects’ time together with associated information technology and other materials. The challenge is to define a product in terms of its characteristics, and then determine a real price for that product in future periods even if such a product is not actually sold. This approach is called model pricing.

8.52 The model pricing approach defines a notional product (the model) that is to be priced over time. The circumstances that dictate the use of model pricing mean that the products are themselves unique, and frequently the products provided are complex in nature.

8.53 There are several techniques that may be used in identifying and describing a notional product. All such approaches require a high degree of interaction and cooperation with data providers, and these approaches are individually tailored to providers:
  • Repeat recent sale: an actual product sold in a recent period is used as the notional product
  • Base product: a base level or standard product is chosen as the notional product
  • Hypothetical single product: a hypothetical product that is representative of the types of products produced by the provider
  • Hypothetical component model: a notional model incorporating the key components from the various items produced.

8.54 A limitation of the model pricing approach is that the specified product must continue to be representative of the types of products being produced. This means that the notional model must be frequently checked for representativeness, and updated and re-specified over time.

8.55 The ABS works with producers of unique products to apply price collection procedures that yield the correct price movement with the least burden placed on providers.

8.56 There are several techniques to repeatedly price these notional models:
  • Single price approach: whereby the provider determines the price for the completed model and reports this back to the ABS
  • Component pricing: whereby prices of components are collected from a provider and aggregated in a pre-determined manner. This approach is readily applicable to the hypothetical component model, but is also applicable to other models where sufficient information regarding their composition is available. In practice component pricing is achieved in several ways:
      (a) provider algorithm: in this case the provider agrees to collect prices for individual components and combines the price to one final price
      (b) ABS algorithm: in this case the provider agrees to report prices for individual components only, and the prices are combined to a final price by the ABS.

8.57 The ABS regularly re-visits providers who supply data using a model price. These visits re-emphasise the importance of model pricing and are an opportunity to update the product specification for model pricing.


TRANSFER PRICES

8.58 Transfer prices are the prices adopted for bookkeeping purposes between affiliated enterprises under common management and may not correspond to prices that would be charged to independent parties. Affiliated enterprise may set the prices of transactions among themselves artificially high or low in order to effect an unspecified income payment or capital transfer.


Transfer prices and the PPI

8.59 Transfer prices should be used with caution because transactions to another part of the same business (or to an affiliated business) may not reflect the true price (or true price movements) otherwise observed in the marketplace. The ABS only includes a transfer price in the PPI when the price behaviour is confirmed to represent true market transactions.


Transfer prices and the customs frontier

8.60 Where the parties to the transactions are between affiliated enterprises in different countries, the prices adopted in their books for recording transactions in products may not correspond to prices that would be charged to independent parties. Transfer pricing to avoid tax is illegal in Australia, and consequently the distortions in economic statistics caused by transfer pricing through the customs frontier are not considered widespread. For these reasons, transfer prices are sometimes included in the Import Price Index and Export Price Index. This practice is consistent with the practical treatment of these value data (for merchandise crossing the customs frontier) in both the Australian National Accounts and international accounting frameworks.


PRICE COLLECTION PROCEDURES

8.61 The PPIs and ITPIs use a range of collection methods to collect prices data each period, including personal interview at enrolment, a quarterly survey form (Survey of Producer Prices), collection of price data from company websites, use of media reports, use of administrative by-products and data from other ABS collections.


Tailored forms

8.62 The forms for the Survey of Producer Prices are tailored specifically for each provider. The products priced and the descriptions of these products are tailored to individual providers. The Survey of Producer Prices uses a mail out-mail back tailored questionnaire.

8.63 Within the ABS electronic information is secure with access restricted to those officers compiling the price index. Acknowledging that electronic communication may reduce provider burden for some providers, the ABS has a secure and confidential collection facility which is known as a secure deposit box. The secure deposit box provides internet-based facilities for providers to lodge survey data with the ABS.

8.64 The ABS is also introducing online forms as the primary method of data collection, replacing the traditional paper form. Online forms provide a quick, easy and secure way to complete and submit survey data. The ABS is progressively moving towards an eForms environment.

8.65 The ABS ensures that its price baskets remain representative through the facilitation of a dedicated program to maintain and review the sample of products. This program involves contact with a selection of providers outside of the quarterly cycle of the Survey of Producer Prices. Pricing data are frequently collected during these provider interactions and are often used in place of (or to supplement) the quarterly price collection. Maintenance of the samples of products is discussed in detail in Chapter 11.

8.66 Compilation of the PPIs and ITPIs uses data from other sources in addition to that collected in quarterly survey forms. In some cases data collected for the production of international and merchandise trade statistics are used, particularly in those cases where the products are homogeneous.

8.67 The ABS also uses data that are readily available in the public domain, such as exchange rates, and some commodity data. In addition, the ABS sources data from other Australian Government agencies (particularly for mineral fuels and some agricultural products).

8.68 In the cases where internet prices reflect actual transaction prices the ABS will use this data to supplement its price samples.

8.69 In some cases the ABS purchases data from third parties, particularly when measurement of prices for groups of products requires additional specialist skills. For example, the ABS purchases data from quantity surveyors as one input into price measures for the Outputs of the construction industry.