CHAPTER 13 DESCRIPTIONS OF INDEXES


INTRODUCTION

13.1 This chapter provides details of the key Australian Producer Price Indexes (PPIs) and International Trade Price Indexes (ITPIs) published by the Australian Bureau of Statistics (ABS). It describes the scope of each index, provides details about weights, and highlights practical difficulties particular to each of the indexes. For detailed information about weights for the PPIs, see Producer Price Indexes Weighting Patterns, 2015 (cat. no. 6427.0.55.006). Weights for the ITPIs are updated annually and published in the September quarter release of International Trade Price Indexes, Australia (cat. no. 6457.0).

13.2 This chapter also covers the Stage of Production (SOP) Producer Price Indexes, describing the concept of transaction flows, division of the economy into successive stages and the derivation of the weights for the different Stages of Production.


MINING INDUSTRIES PRODUCER PRICE INDEXES

Table 13.1 Input to the coal mining industry
Type of index		Input price index
Purpose		This price index measures changes in the prices paid for input to the coal mining industry.
Major uses		The major use of this price index is for contract adjustment. As this is an input index its components are not used in the Stage of Production price indexes.
Pricing basis		Purchasers’ prices, in this case actual transaction prices (including any discounts etc.) paid by coal mines to suppliers for inputs delivered to mine sites). The prices used include all relevant charges and freight costs, net of any discounts and rebates. The Goods and Services Tax (GST) is excluded from the prices because, in the main, it is deductible on business-to-business transactions. Prices include delivery to a mine site, or to the primary storage site for a group of mines.
Classification system		The Input to the Coal mining industry index is classified in accordance with the Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006.
Composition and weighting		The weighting pattern for this price index was derived from the Australian National Accounts: Input-Output Tables - Electronic Publication, 2012-13 Final (cat. no. 5209.0.55.001).
Weight reference period		2012-13
Link period		June quarter 2015
Index reference period		2011-12 = 100.0

MANUFACTURING INDUSTRIES PRODUCER PRICE INDEXES

Table 13.2 Output of the manufacturing industries
Type of index		Output price index (gross division)
Purpose		Measures changes in the prices in output of the manufacturing industry as a whole, and by the fifteen subdivisions within the manufacturing division.
Major uses		Volume measures in the Australian National Accounts; general economic analysis; contract adjustment. The components of these indexes are also inputs to the Australian Stage of Production (SOP) Producer Price Indexes (PPIs).
Pricing basis		Basic prices, the manufacturers' selling prices, exclusive of excise taxes and GST. As far as possible, actual transaction prices are collected from businesses, representative of discounts offered or other differences from list prices. The index aims to measure prices ex-factory, although costs such as transport and handling are included if they are an indistinguishable part of the price.
Classification system		Products are classified according to the Input-Output Product Classification (IOPC). Published indexes are classified according to ANZSIC 2006.
Composition and weighting		Indexes are published for total manufacturing (ANZSIC 2006 Division C), and for selected industry groupings based on ANZSIC 2006 down to four digit levels. The total division index is compiled on a gross division basis, i.e. prices relate to all products produced by manufacturers, including those sold overseas and used by the manufacturers. Upper level weights are derived from Input-Output tables.
Weight reference period		2012-13
Link period		June quarter 2015
Index reference period		2011-12 = 100.0

Table 13.3 Input to the manufacturing industries
Type of index		Input price index
Purpose		Measures changes in the prices of goods and services used by the manufacturing industry as a whole, and by the fifteen ANZSIC 2006 subdivisions within the manufacturing division. Series are also provided for goods and services classified according to whether they are domestically produced or imported.
Major uses		Volume measures in the Australian National Accounts; general economic analysis; contract adjustment.
Pricing basis		Manufacturers' purchase prices, generally on a delivered into store basis. This equates to purchasers’ prices. As far as possible, actual prices are collected from manufacturers, with some exceptions when it is more efficient to collect from suppliers (for example, electricity prices).
Classification system		Products are classified according to IOPC. Published indexes describe industry of use and products classified by industry of origin, with industries classified in accordance with ANZSIC 2006.
Composition and weighting		Indexes are published for total manufacturing (ANZSIC 2006 Division C), and for selected industry groupings based on ANZSIC 2006 down to four digit levels. The total division index is compiled on a gross division basis, i.e. prices relate to all products purchased by manufacturers, including those purchased from overseas. Similarly, independent gross division indexes are also compiled at the subdivision and group (two and three digit) levels. Upper level weights are derived from Input-Output tables.
Weight reference period		2012-13
Link period		June quarter 2015
Index reference period		2011-12 = 100.0

CONSTRUCTION INDUSTRIES PRODUCER PRICE INDEXES

Table 13.4 Output of the construction industries
Type of index		Output price index (gross division)
Purpose		These price indexes measure changes in the prices received for the output of selected components of the construction industries.
		These components are:
		Subdivision 30 - Building construction
		Class 3011 - House construction
		Class 3019 - Other residential construction
		Class 3020 - Non-residential construction
		Class 3101 - Road and bridge construction.
Major uses		Volume measures in the Australian National Accounts, general economic analysis; contract adjustment. The components of these indexes are also inputs to the Australian SOP PPIs.
Pricing basis		Basic prices. The general approach is model pricing, where the components of a 'typical' construction project are repriced over time to provide measures of price change. The price 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.
Classification system		The Output of the Construction Industries indexes are classified in accordance with ANZSIC 2006.
Composition and weighting		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.
Weight reference period		2007-08 for the national level and 2010-11 for the state and territory level.
Link period		June 2012
Index reference period		2011-12 = 100.0

Table 13.5 Input to the House construction industry
Type of index		Input price index
Purpose		Measures changes in the prices of selected inputs used in the construction of detached houses in each of the six state capital cities.
Major uses		Volume measures in the Australian National Accounts, general economic analysis; contract adjustment.
Pricing basis		Purchasers’ prices, in this case actual prices (including any discounts etc.) paid by building contractors or subcontractors for inputs delivered to the building sites. Deductible indirect taxes such as GST are excluded from prices. Prices are collected directly from manufacturers and wholesalers of building materials rather than from builders themselves, although such prices include delivery to building site where appropriate.
Classification system		The Input to the House Construction industry index is classified in accordance with ANZSIC 2006, Class 3011 - House Construction.
Composition and weighting		The weighting pattern is calculated using bill of quantities data for 2010-11 obtained from quantity surveyors. These quantities are price updated to 2012-13 and then benchmarked to the Building Activity, Australia (cat. no. 8752.0) total value work done for houses, by capital city.
		The weighting pattern for each capital city index reflects variations in prices for the cities as applied to an Australian average basket of house building inputs, with some allowance for city specific building practises, for example the differential use of steel and timber materials in Perth and Adelaide compared with the other capital cities.
Weight reference period		2010-11 for input details, 2012-13 for state expenditure pattern.
Link period		September quarter 2013
Index reference period		2011-12=100.0

SERVICES INDUSTRIES PRODUCER PRICE INDEXES

Table 13.6 Output of the services industries
Current services industries indexes		• 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
		• Other services industries.
Type of index		Output price index (gross division)
Purpose		Measure changes in the prices of services classified to selected divisions of ANZSIC 2006. Note that some ANZSIC 2006 industries do not yet have established indexes, and thus are not represented within these tables.
Major uses		Volume measures in the Australian National Accounts; general economic analysis; contract adjustment. The components of these indexes are also inputs to the Australian SOP PPIs.
Pricing basis		Prices relate to amounts received by service providers, exclusive of any taxes on products and transport and trade margins. Where possible, actual prices, including the effects of any discounts offered are used in the indexes. Samples are regularly updated and pricing methodologies are reviewed over time. The complexities involved in measuring services output prices mean that there is no single method of pricing.
		The most appropriate pricing strategy for any particular business provider is determined by way of extensive industry consultation.
Classification system		Services are classified according to their ANZSIC 2006 industry of origin (4-digit class level). Indexes are available at the 4 digit ANZSIC 2006 level for most services, with aggregate indexes published for significant groups, subdivisions and divisions.
Composition and weighting		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, 2012-13 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).
Weight reference period		2012-13
Link period		June quarter 2015
Index reference period		2011-12=100.0

INTERNATIONAL TRADE PRICE INDEXES

Table 13.7 Export Price Index
Type of index		Output price index
Purpose		The Export Price Index (EPI) measures changes in the prices of exports of merchandise from Australia, including re-exports (goods which are imported into Australia then exported at a later date without physical transformation). The index numbers for each quarter relate to prices of exports actually shipped during that quarter.
Major uses		Volume measures in the Australian National Accounts; Balance of Payments; general economic analysis; contract adjustment. The components of these indexes are also inputs to the Australian SOP PPIs.
Pricing basis		In general, prices are obtained from major exporters of the selected products included in the index. The prices used in the index are the prices at which the products physically leave Australia, i.e. the prices are free on board (f.o.b.) at Australian ports of export. Prices used in the index are expressed in Australian currency.
		As a result, changes in the relative value of the Australian dollar against overseas currencies (in particular the major trading currencies such as the US dollar, Japanese yen, Pound sterling and Euro) can have a direct and significant impact on the price movements of the many products that are sold in terms of prices expressed in overseas currencies. Forward exchange cover is excluded from the prices used in the index.
Classification system		Products in the EPI are classified according to the Australian Harmonised Export Commodity Classification (AHECC). Index numbers are produced in accordance with four classifications: (i) AHECC; (ii) The Standard International Trade Classification (SITC), Revision 4; (iii) ANZSIC (industry of origin basis); and (iv) the Balance of Payments Broad Economic Category Classification (BoPBEC).
Composition and weighting		The EPI is a Laspeyres type index that is annually chain linked. Products are selected based on their value of exports in the preceding two years. Their weights are derived from the same value of exports data. For example, data from the years 2010/11 and 2011/12 are combined to inform the selection of products and to derive their weights for the index in 2012/13.
Weight reference period		The weight reference period spans the preceding two years. For example, the 2012/13 financial year indexes have a weight reference period that spans the 2010/11 and 2011/12 financial years.
Link period		June quarter each year
Index reference period		2011-12=100.0

Table 13.8 Import Price Index
Type of index		Input price index
Purpose		The Import Price Index (IPI) measures changes in prices of imports of merchandise into Australia. The index numbers for each quarter relate to prices of imports landed in Australia during the quarter.
Major uses		The main uses of the IPI are for the production of volume estimates in the Australian National Accounts; Balance of Payments; general economic analysis; and the indexation of business contracts. The components of these indexes are also inputs to the Australian SOP PPIs.
Pricing basis		Prices of individual shipments are obtained from major importers of the selected items. Imports are priced on a f.o.b. country of origin basis. Freight and insurance charges involved in shipping the products from foreign countries to Australian ports are excluded from the prices used in the index, as are Australian import duties. All prices used in the IPI are expressed in Australian currency.
		As a result, changes in the relative values of the Australian dollar and overseas currencies can have a direct impact on price movements of imports that are purchased in foreign currencies. Prices reported in a foreign currency are converted to Australian dollars using the relevant exchange rates at the date of change of ownership. Where foreign currency purchase prices use forward exchange cover, the prices used in the index exclude the forward exchange cover.
Classification system		The Standard International Trade Classification (SITC), Revision 4 is the primary classification system for the IPI. The SITC (Revision 4) used from the September quarter 2008 onwards is the United Nations' updated version, replacing SITC (Revision 3). SITC (Revision 4) retains the overall structure of SITC (Revision 3) and consists of the same number of sections, divisions and groups. Changes to the classification labels and components were made at levels lower than those used in the IPI and EPI.
		As a result, there has been no material impact on the indexes, which remain comparable across the changes in classification. Indexes are also published according to BoPBEC. To comply with international statistical agreements, indexes are also published, and available on request, according to the Combined Australian Customs Tariff and Statistical Nomenclature (Customs Harmonised Tariff), based on the international Harmonised System (HS).
Composition and weighting		The IPI is an annually reweighted chained Laspeyres index. The index items were selected based on the significance of their import value in the year preceding the index year (for example, 2011-12 for the 20012-13 indexes) and the weights each year are based on the imports from the preceding year.
Weight reference period		The IPI is reweighted each year, linked through the June quarter, based on the average values of imported merchandise trade for the immediately preceding financial year.
Link period		June quarter each year
Index reference period		2011-12=100.0

STAGE OF PRODUCTION PRODUCER PRICE INDEXES

Table 13.9 Stage of Production
Type of index		Output price indexes (transaction flow). Note: a more detailed description of the SOP PPIs can be found in the section below.
Purpose		SOP indexes are economy-wide price measures. According to the SOP concept, all products are categorised into three stages, i.e. Preliminary Demand, Intermediate Demand and Final Demand. These stages are not aggregated. The basis for the categorisation is the Australian Input-Output tables. The indexes of each stage cover both domestically produced and imported products, individually and in aggregate.
		The SOP indexes are compiled from data used in the industry Producer Price Indexes and the International Trade Price Indexes.
Major uses		The SOP framework allows for analyses of price change as products flow through the production process. Price changes for earlier stages of production may be indicators of possible future price changes for other stages.
Pricing basis		In concept, the valuation basis of the SOP indexes is basic prices i.e. the prices received by producers for sale of their products. The SOP indexes include both domestic and imported products. SOP indexes are compiled using other PPIs. However, the use of component series from existing ABS price collections results in some cases in the pricing basis diverging from the ideal (i.e. basic prices).
		For example, some components are sourced from prices collected for the Input to the manufacturing industries, which are valued at purchasers’ prices.
Classification system		Products are classified according to their industry of origin (or competing industry of origin for imports) according to ANZSIC 2006. Imported products are classified to their equivalent Australian industry of origin. Products are also classified according to their “stage of production” destination. The destination classification is further disaggregated for the final stage, with products classified by destination to consumer, capital or export.
Composition and weighting		Items included in the SOP indexes reflect the values of product and service flows from the 2012-13 Input-Output tables.
Weight reference period		2012-13
Link period		June quarter 2015
Index reference period		2011-12=100.0

13.3 The SOP PPIs relate to the supply of products to the Australian economy in a SOP framework. The indexes cover both domestically produced and imported products, individually and in aggregate. The basis for the categorisation is the Australian National Accounts: Input-Output Tables. The SOP indexes are compiled from data used in the industry indexes, the International Trade Indexes and some additional data collections.

13.4 These indexes are compiled within the statistical framework outlined in the Information Paper: An Analytical Framework for Price Indexes in Australia, 1997 (cat. no. 6421.0) and are designed to support the study of price inflation.

13.5 A more detailed explanation of the SOP concept is contained in the Information Paper: Producer Price Index Developments (cat. no. 6422.0), released on 25 March 1999.


Pricing basis

13.6 In concept the valuation basis of the SOP indexes is at basic prices. 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 f.o.b. basis, rather than cost, insurance, freight (c.i.f.), which approximates basic prices.


The SOP concept

13.7 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, 2012-13 Final (cat. no. 5209.0.55.001). Transactions (flows of products) are placed in one of three stages:

• Preliminary demand - Products either directly or indirectly consumed as inputs into the production of Intermediate demand
• Intermediate demand - Products consumed as inputs into the production of Final demand
• Final demand - Products consumed as Final demand, with no further processing.

This initial breakdown of the product flows into final and non-final represents a useful economic dissection of producers' transactions. However, the non-final products can flow into the production of both final and other non-final products. Therefore, to aid analysis, the non-final product flows have been divided on a sequential basis into stages, preliminary products and intermediate products as illustrated below. This approach results in three separate stages of production.

13.8 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 products flow through different production processes.

13.9 Under this framework, preliminary products are used either directly or indirectly in the production of intermediate products; in turn intermediate products flow into the production of final products.

13.10 The framework allows for analyses of price change as products 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

13.11 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

13.12 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 in the quarterly PPI publication. Index series for Final demand including exports are available in Table 10 of the same publication.

13.13 Import transactions are included within the framework, recognising that they represent an important potential source of inflationary pressure.

13.14 The SOP concept incorporates all flows of transactions within the economy. While goods have been reasonably well represented, this is less the case for Services industries. The ABS has an ongoing Services Producer Price Indexes Development program to expand the coverage of Services industries, including the major 'margin' services of retail and wholesale. Indexes for these industries are progressively incorporated as they are assessed as fit-for-purpose.


Products and weights: transaction flows and the National Accounts Input - Output table

13.15 The basis of the weights for SOP is the use table from the Input-Output framework. The products included in the stages, for both domestic supply and imports are given proportional weights that reflect the values of product flows.


METHODOLOGY USED FOR DERIVING STAGE OF PRODUCTION WEIGHTS

13.16 The Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.004) recommended that the SOP indexes be updated to incorporate weights from the latest available 2007-08 Input-Output (I-O) tables. the current methodology used for deriving SOP weights can be found in Appendix 2 of the Implementation of the Review of the Producer and International Trade Price Indexes, 2012 (cat. no. 6427.0.55.005). From the September quarter 2015 the SOP indexes weights were updated using data from the 2012–13 Australian National Accounts: Input–Output (I–O) Tables.