Latest release

Producer and International Trade Price Indexes: Concepts, Sources and Methods

Provides a comprehensive description of the Australian Producer Price Indexes (PPI) and the International Trade Price Indexes (ITPI)

Reference period
2022
Released
29/04/2022

Preface

This publication documents the concepts, sources and methods used to compile the Producer Price Indexes (PPI) and International Trade Price Indexes (ITPI).

This publication is a guide to Australia's Producer and International Trade Price Indexes. It aims to provide users with an explanation of: 

  • The historical background 
  • Their underlying conceptual framework
  • The data sources and methods used to compile the indexes
  • The presentation and publication of the price indexes
  • Their relationship to other economic statistics

Editions

This is the third edition of the Producer and International Trade Price Indexes: Concepts, Sources and Methods. The chapters released in this edition have been updated to reflect changes made to the sources and methods used to compile the Australian Producer and International Trade Price Indexes since the second edition.

This is consistent with the following ABS publications, inclusive of the most recent releases:

The first edition of the Producer and International Trade Price Indexes: Concepts, Sources and Methods, in its current format, was published in August 2006. 

Release of Producer and International Trade Price Index data

The PPIs and ITPIs are compiled quarterly by the ABS for quarters ending in March, June, September and December each year. The quarterly index numbers are published no later than 33 days after the end of the reference period in Producer Price Indexes, Australia (cat. no. 6427.0), and International Trade Price Indexes, Australia (cat. no. 6457.0).

 

ABS contacts

The ABS will periodically update this document. Comments and requests for further information about the topics covered in this publication should be directed to:

Director
Producer & International Trade Price Indexes
Australian Bureau of Statistics
PO Box 10
Belconnen, ACT, 2616
Email: producer.prices@abs.gov.au

The ABS Privacy Policy outlines how the ABS will handle any personal information that you provide to us.

 

History of changes

April 2022

November 2015

  • Updates include references to Input Output tables, weight reference periods and link periods relating to Producer Price Indexes (PPI). From the September quarter 2015 the Producer Price Indexes' weights were updated using data from the 2012–13 Australian National Accounts: Input–Output (I–O) Tables.

Previous catalogue number

This release previously used catalogue number 6429.0

Chapter 1 Introduction

The Producer and International Trade Price Indexes provide both industry and economy-wide price indicators for the Australian economy.

The Producer Price Indexes measure the change in the prices of products (goods and services) as they leave the place of production or as they enter the production process. The International Trade Price Indexes measure the change in the prices paid for imported products and the prices received for exported products.

This release provides a comprehensive description of the Producer Price Indexes and the International Trade Price Indexes.

The publication is separated into five sections to assist users with obtaining both a technical and practical understanding of the methodology used to compile the Producer and International Trade Price Indexes. The five sections of this release are:

  1. Introduction
  2. General Methodology
  3. Technical Methodology
  4. Practical Methodology
  5. Historical background

Each of the sections aims to provide a general flow for users to develop their understanding of the Producer and International Trade Price Indexes.

At present the following indexes are published:

Producer Price Indexes
  • Final Demand
  • Mining Industries Producer Price Indexes
    • Input to the Coal mining industry
    • Output of the mining industry
  • Manufacturing Industries Producer Price Indexes
    • Input to the Manufacturing industries
    • Output of the Manufacturing industries
  • Construction Industries Producer Price Indexes
    • Input to the House construction industry
    • Output of the Construction industries
  • Services Industries Producer Price Indexes
    • Output of the Accommodation and food services industries
    • Output of the Transport, postal and warehousing industries
    • Output of the Information media and telecommunications industries
    • Output of the Rental, hiring and real estate services industries
    • Output of the Professional, scientific, and technical services industries
    • Output of the Administrative and support services industries
    • Output of the Public administration and safety industries
    • Output of the Education and training services industries
    • Output of the Health care and social assistance services industries
    • Output of the Other services industries
International Trade Price Indexes
  • Import Price Index
  • Export Price Index

Chapter 2 General Methodology

Introduction

The Australian Producer and International Trade Price Indexes are compiled in broad agreement with the guidelines contained in the International Monetary Fund’s Producer Price Index Manual, Theory and Practice (2004) and Export and Import Price Index Manual, Theory and Practice (2009).

As the International Monetary Fund’s guidelines are not targeted to harmoniously align with the broad range of industries of the Australian economy, this section of the release explores the historical development of the Producer and International Trade Price Indexes and outline the current methodology used by the ABS in the compilation of the Australia, Producer Price Indexes (PPI), and International Trade Price Indexes (ITPI).

Historical Development

The first Producer Price Indexes compiled by the ABS was the Melbourne Wholesale Price Index. This index was introduced in 1912 with historical index numbers from 1861. Prices were obtained from newspapers and trade publications. The index was compiled until 1961. The index primarily included basic materials and food stuffs, weighted together using consumption data from 1910. Neither the list of products nor the weighting varied during the life of the index. 

The Wholesale Price (Basic Materials and Foodstuffs) Index was introduced in 1939 with historical index numbers available from 1928. The index was compiled until 1970. The prices used in the index were, in the main, obtained directly from manufacturers and merchants in Melbourne (with a few important exceptions). Products in the index were priced in their basic form wherever possible and in respect of imported materials as near as possible to the point where they made their first effective impact on the local price structure. The weights were based on estimates of the average annual consumption of the products in Australia during the period 1928-29 to 1934-35 inclusive. 

Over the 1960s, 1970s and 1980s a number of new indexes were introduced. These included monthly input indexes of the building construction industry, monthly input and output indexes of the manufacturing industry, and monthly input indexes of the coal mining industry. From 1997 these indexes were compiled and published on a quarterly basis. From 2000 the ABS introduced quarterly construction industry output price indexes, services industries output price indexes, and stage of production price indexes. From the June quarter 2001 a number of Producer Price Index industry publications were amalgamated into a single publication, Producer Price Indexes, Australia.

An industry approach to defining and weighting the Producer Price Indexes was adopted from the September quarter 2012 as a result of the Producer and International Trade Price Indexes Review. This approach replaced the product approach. As a consequence, the PPIs are compiled using weights and prices for products used by, or produced by, businesses classified to industries as defined in the Australian and New Zealand Standard Industry Classification. The titles of the indexes were also changed to reflect the industry approach.

More information on the outcome and implementation of the review of the Producer and International Trade Price Indexes can be found in the Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 and Information Paper: Implementation of the Review of the Producer and International Trade Price Indexes, 2012.

In December 2019 the ABS discontinued the Stage of Production (SOP) series and instead moved to publishing only the Final Demand (excluding exports) series. The SOP indexes included (Preliminary, Intermediate, and Final demand). The discontinuation resulted from a review undertaken by the ABS in consultation with key users. The review identified more detailed analysis and coverage of industry indexes was more desired than SOP outputs. The ABS agreed to focusing efforts towards enhancing industry indexes, expanding coverage, and completing a weighting review of the PPI's.

The Import Price Index and Export Price Index are annually re-weighted chained Lowe indexes. This method of weighting was introduced for the September quarter 2000 and replaced the 'fixed-base' method of weighting in which the weighting patterns were updated infrequently (generally once every 5 or 10 years).

In March quarter 2022 the ABS re-weighted PPI indexes in line with the 2018/19 Australian National Accounts: Input-Output tables. Included in the re-weight were the Final demand, Input to the Manufacturing, Output of the Manufacturing, Output of the Services, and Division B Output of the mining indexes. Excluded from the re-weight were the Construction industries and Input to the Coal mining index. Weighting patterns of the PPIs are updated infrequently (generally once every 5 or 10 years).

Purpose

The principal purpose of the Producer and International Trade Price Indexes is to measure price change by industry to support the compilation of the Australian National Accounts and the Balance of Payments.  This requires that their compilation be on a basis coherent with the frameworks underlying those statistics (Australian System of National Accounts and Balance of Payments and International Investment Position Manual Sixth Edition, 2008) and informs many aspects of the current methodology of both the Producer and International Trade Price Indexes.

In the compilation of the Australian National Accounts and the Balance of Payments, components of the Producer and International Trade Price Indexes are primarily used as deflators to produce Chain Volume Measures.

The Producer and International Trade Price Indexes are also used:

Scope

The scope of both the Producer and International Trade Price Indexes is primarily linked to the principle purpose of both statistical releases; the compilation of Australian National Accounts and the Balance of Payments.

An understanding the economic principles and framework of both the Australian National Accounts and the Balance of Payments will allow users to fully understand the true scope of the Producer and International Trade Price Indexes in both theory and practice. This detail is available on the next page, The Australian System of National Accounts.

The Australian System of National Accounts

The Australian System of National Accounts (ASNA) is a systematic framework of statistics providing a wide range of information about the economy and its components. At their summary level, the accounts reflect key economic flows: production, income, consumption, investment and saving. At their more detailed level, they are designed to present a statistical picture of the structure of the economy and the detailed processes that make up domestic production and its distribution.

The Input-Output Framework

The Input-Output (I-O) tables form an integral part of the ASNA. They present a comprehensive picture of the supply and use of all products in the economy, and the incomes generated from production. They also provide a much more detailed disaggregation of gross domestic product than is available in the National Income, Expenditure and Production Accounts.  They provide a framework for checking the consistency of statistics on flows of goods and services obtained from quite different kinds of statistical sources - industrial surveys, household expenditure surveys, investment surveys, foreign trade statistics, etc. In national accounting and economic analysis two kinds of I-O tables are referred to:

  • Supply and Use (S-U) tables; and
  • I-O tables, including symmetric I-O tables (product by product or industry by industry matrices which combine supply and use into the one table, with identical classifications of products or industries applied to both rows and columns).

The S-U tables form the starting point for constructing I-O tables. Both the S-U tables and I-O tables provide a means of undertaking detailed analysis of the process of production and the use of goods and services (i.e. products), and of the income generated in that production.

Supply-use framework

In Figure 2.1 below, an example of the composition of the supply-use (S-U) tables that underpin the Input-Output (I-O) tables is presented. The S-U framework comprises of two tables 'supply' and 'use'. The supply table shows the total supply of products from domestic and foreign producers that are available for use in the domestic economy. The use table presents the use of this supply by industries as intermediate inputs and by final users.

  • Within supply is industry, and beneath this is output. Products under output are farmer to grain, baker to bread, and hospital to health services. These all make up total output (A). Also under supply are taxes/subsidies, margins, and imports.
  • Supply equals use. Within use is industry, and beneath this is intermediate input. Products under intermediate input are fertiliser to farmer, flour to baker, and pharmaceuticals to hospital. These all make up total intermediate input (B). Also under use is final demand. Beneath final demand are government, households, capital, exports, and inventories.
  • Gross value added (production) equals total output minus total intermediate input, or A minus B.
  • A minus B equals gross value added income. This includes compensation of employees, other net taxes on production, and gross operating surplus

Figure 2.1 Supply-use tables - framework for the economy

Figure shows an example of the composition of the Supply-Use tables that underpin the Input-Output tables is presented, and the table consists of two sections – ‘Supply’ and ‘Use’.
Within supply is industry, and beneath this is output. Products under output are farmer to grain, baker to bread, and hospital to health services. These all make up total output (A). Also under supply are taxes/subsidies, margins and imports.

Supply equals use. Within use is industry, and beneath this is intermediate input. Products under intermediate input are fertiliser to farmer, flour to baker, and pharmaceuticals to hospital. These all make up total intermediate input (B). Also under use is final demand. Beneath final demand are government, households, capital, exports, and inventories.

Gross value added (production) equals total output minus total intermediate input, or A minus B.

A minus B equals gross value added income. This includes compensation of employees, other net taxes on production, and gross operating surplus.

Presenting the Input-Output Tables

The Input-Output (I-O) tables present a comprehensive picture of the supply and use of all products in the economy, and the incomes generated from production.

    They provide a framework for checking the consistency of statistics on flows of goods and services obtained from quite different kinds of statistical sources - industrial surveys, household expenditure inquiries, investment surveys, foreign trade statistics, etc. The Australian System of National Accounts (ASNA), and the I-O tables in particular, serves as a coordinating framework for economic statistics, both conceptually for ensuring the consistency of the definitions and classifications used and as an accounting framework for ensuring the numerical consistency of data drawn from different sources. The I-O framework is also appropriate for data estimation purposes, and for detecting weaknesses in data quality and estimation. By providing information on the structure of, and the nature of product flows through the economy, the I-O tables assist in the decomposition of transactions into prices and volumes for the calculation of an integrated set of price and volume measures. As an analytical tool, input-output data are conveniently integrated into macroeconomic models in order to analyse the link between final demand and industrial output levels.

    Input-Output tables can be presented in either basic prices or purchasers’ prices, and the valuation basis for products is an important factor dependent upon which section of the supply-use framework the products are situated.

    If users are looking at a use matrix within an I-O table, for the intermediate inputs matrix, industries appear across columns and products across rows. In the intermediate inputs matrix, each cell indicates the amount of a product purchased by each industry as an intermediate input into the industry’s production process.  Within the final demand matrix, products are presented in the rows, and final demand categories (rather than industries) valued at purchasers' prices appear across the columns. The tables below are valued at basic and purchasers’ prices with Output indexes I-O framework at basic prices (Table 2.2) and Input indexes I-O framework at purchasers’ prices (Table 2.3). 

    The 'Supply' table of the Input-Output tables

    If looking at a supply matrix within an Input-Output table, the domestic output matrix forms the main body of the table. In this matrix, industries appear across columns and products across rows, and each cell indicates the amount of each product that is produced domestically by each industry at basic prices. Total domestic supply by commodity (valued at basic prices) presents the sum of the domestic output and imports. Imports are valued at domestic port value, that is, free on board, which is equivalent to the importer’s customs frontier price. An example of the supply 'output' table is demonstrated in Table 2.2 below.

    The 'Use' table of the Input-Output tables

    Table 2.3 is an industry-level use table in the supply-use framework. This table comprises the intermediate inputs matrix, final demand matrix, and value-added matrix. The structure of the use table shows the use of products by industries and by final users as well as the value added by industry at purchasers’ prices. Valuation in purchasers’ prices shows inputs to industries and final uses at values that reflect the actual cost to the user of the product. These costs include the costs of transporting the product to the user in addition to any wholesale and retail mark-ups incurred while bringing the product to market.

    The intermediate inputs matrix forms the central part of the use table. This represents expenditure of products by industry that are used as an intermediate input into the industry’s production process. These products are valued at purchasers’ prices, meaning that taxes, transportation costs, and wholesale and retail trade margins are embedded in the total along with the underlying value of the product purchased. No distinction is made in the use table between imports and domestically produced output.

    The final demand matrix within the ‘Use’ table presents expenditure-side components of GDP, including household and government final consumption expenditures, gross final capital formation, change in inventories and exports.

    Table 2.2 Output indexes, PPI and ITPI coverage, Input-Output framework at basic prices

    Table 2.2 Output indexes, PPI and ITPI coverage, Input-Output framework at basic prices
    Looking across the rows of a table at purchasers’ prices, the margin elements are included in the values of the flows of all the products which attract the margin; on the other hand, in a table at basic prices, the margin product flows (e.g. retail trade, road freight, etc.) are shown separately in their own right against the appropriate industry (e.g. transport). Note that as per the 2008 SNA definition of basic prices, transport costs are included in basic prices of other products in those cases where the transport service is not separately invoiced.

    The I-O Output table consists of the following rows:
    Intermediate Inputs:
    Agriculture, forestry & fishing
    Mining
    Manufacturing
    Electricity, gas, water & waste services
    Construction
    Wholesale trade
    Retail trade
    Accommodation & food services
    Transport, postal & warehousing
    Information media & telecommunications
    Financial & insurance services
    Rental, hiring & real estate services
    Professional, scientific & technical services
    Administrative & support services
    Public administration & safety
    Education & training
    Health care & social assistance
    Arts & recreation services
    Other services

    Primary Inputs:
    Wages, salaries & supplements
    Gross operating surplus
    Commodity taxes (net)
    Indirect taxes n.e.c (net)
    Sales by final buyers

    And the following columns:
    Intermediate demand:
    Agriculture
    Mining
    Manufacturing
    Electricity etc
    Construction
    Services

    Final demand:
    Intermediate use (sub-total)
    Final consumption expenditure – private
    Final consumption Expenditure - government
    Gross fixed capital expenditure – private enterprises
    Gross fixed capital expenditure – public enterprises
    Gross fixed capital expenditure – general government
    Increases in stocks
    Exports of Goods and Services
    Final Demand (subtotal)
    Total supply (grand total)

    The maximum extent of PPI & ITPI coverage is Intermediate demand.

    Table 2.3 Input indexes, Price index coverage, Input-Output framework at purchasers' prices

    Table 2.3 Input indexes, Price index coverage, Input-Output framework at purchasers' prices.
    There are two alternative treatments of imported products in the tables: direct allocation and indirect allocation. Direct allocation of imports involves allocating all imports directly to the industries which use them. All flows recorded in quadrants 1 and 2 refer only to the use of domestic products, and consequently quadrant 1 does not reflect the technological input structure of the industry. Indirect allocation of imports involves first recording all imports as adding to the supply of the industry to which they are primary and then allocating this supply along the corresponding row of the table to using industries. The result is that flows in quadrants 1 and 2 contain imported and domestically produced products without distinction. Quadrant 1 then better reflects the technological input structure of the industry and quadrant 2 better reflects the product composition of final demand.

    The I-O Input table consists of the following rows:
    Intermediate Inputs:
    Agriculture, forestry & fishing
    Mining
    Manufacturing
    Electricity, gas, water & waste services
    Construction
    Wholesale trade
    Retail trade
    Accommodation & food services
    Transport, postal & warehousing
    Information media & telecommunications
    Financial & insurance services
    Rental, hiring & real estate services
    Professional, scientific & technical services
    Administrative & support services
    Public administration & safety
    Education & training
    Health care & social assistance
    Arts & recreation services
    Other services

    Primary Inputs:
    Wages, salaries & supplements
    Gross operating surplus
    Commodity taxes (net)
    Indirect taxes n.e.c (net)
    Sales by final buyers

    And the following columns:
    Intermediate demand:
    Agriculture
    Mining
    Manufacturing
    Electricity etc
    Construction
    Services

    Final demand:
    Components of Final Demand (consumption, investment, inventories & exports)

    Domestic supply:
    Agriculture
    Mining
    Manufacturing
    Electricity etc
    Construction
    Services
    Total supply (grand total)

    The maximum extent of PPI & ITPI coverage is Intermediate demand, Imports and Final demand

    Supply and use of products in aggregate

    At the most aggregate level, the supply and use of products in the National Accounts is the macroeconomic identity equating total supply with total use. Total Supply is the sum of outputs, imports, margins and net taxes (taxes less subsidies on products). Total Use is the sum of intermediate consumption, final consumption of households and governments, capital formation, changes in inventories, and exports.

    Gross Domestic Product
    There are three approaches which can be used to measure Gross Domestic Product (GDP):

    1. The income approach - involves summing net factor incomes, consumption of fixed capital (depreciation) and taxes less subsidies on production and imports
    2. The expenditure approach - involves summing all final expenditures, changes in inventories and exports less imports of products
    3. The production approach - involves taking the value of products produced by an industry (i.e. output) and deducting the cost of products used up by the industry in the production process (i.e. intermediate consumption) and adding the result across all domestic industries. Taxes less subsidies are added on products if output is valued at basic prices, as recommended in the Australian System of National Accounts (ASNA).

    GDP is internationally recognised as the central National Accounts aggregate for measuring national economic performance. It is a measure of production, as distinct from final demand. It measures the value added by the productive activity carried out by all the unit’s resident in an economy. Compiling indexes for tracking the relative change in GDP and its components that can be attributed to price and volume change is one of the primary objectives for ABS Price Indexes.

    The individual elements in the value aggregate equation represent detailed product flows that are classified into categories of transactions.

    There are two defining aspects of recording transactions: timing and valuation.

    Timing of transactions covered

    To associate each transaction with a date, the National Accounts use an accrual basis for accounting as outlined in the ASNA. Accrual accounting records flows at the time economic value is created, transformed, exchanged, transferred or extinguished. This means that flows that imply a change of ownership are entered when the change occurs, services are recorded when provided, output at the time products are created and intermediate consumption when materials and supplies are being used.

    Valuation

    There are two valuation principles in the National Accounts, one for suppliers and one for users. For suppliers, transactions in products are to be valued at basic prices. The basic prices is the price per unit of product receivable by the producer. As the producer does not receive taxes (if any) on products but does receive subsidies (if any) on products, taxes on products are excluded from the  basic price, while subsidies on products are included. Subsidies artificially reduce the sale price, so they are included in the  basic price to obtain a measure of the true value of products produced. Taxes on products, if included, would artificially increase the price and so are excluded. Separately invoiced transportation charges paid by consumers, or any distribution margins added by other, retail/wholesale service producers are also excluded from the basic price. On the other hand, the user, as purchaser, pays all of these charges, and users’ purchases are therefore valued at purchasers’ prices, which add taxes net of subsidies on products and margins for included transportation, insurance, and distribution services to the basic price.

    Accordingly, output and imports are valued at basic prices, to which are added taxes less subsidies on products (net taxes) and margins to arrive at total supply. The components of total uses (including both final expenditure and intermediate consumption) are valued at purchasers’ prices. This is interpreted for the final consumption of households and government. For capital formation expenditures, the notion of purchasers’ prices also includes the costs of setting up fixed capital equipment. For exports, purchasers’ prices include export taxes net of subsidies, according to the free on board value at the Australian customs frontier.

    Comparing basic and producers' prices

    The Australian System of National Accounts (ASNA) uses two kinds of output prices, basic price and producers' price.

    The basic price is the amount receivable by the producer from the purchaser for a unit of a product produced as output, minus any tax payable, plus any per unit subsidy receivable on that unit as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer. However, delivery charges that are not separately invoiced are included in the basic price.

    Example of a basic price:

    Basic price = the amount received by the producer from the purchaser plus any subsidies received on a product.

    Includes:

    • subsidies on products
    • other taxes on production (for example, carbon tax)

    Excludes:

    • taxes on products (for example, GST, excise)
    • other subsidies on production
    • retail and wholesale margins
    • insurance and transport charges separately invoiced.

    The producers’ price is the amount receivable by the producer from the purchaser for a unit of a product produced as output, including any tax that is incorporated within the sales price and excluding any subsidy that reduces the sales price, on that unit as a consequence of its production or sale. It excludes any transport charges invoiced separately by the producer but includes delivery charges not separately invoiced.

    Example of a producers’ price:

    Producers’ price = the amount received by the producer from the purchaser

    Excludes:

    • deductible taxes on products (for example, GST) invoiced to the purchaser and subsidies on products¹
    • retail and wholesale margins
    • insurance and transport charges separately invoiced.

    The producers’ price and the basic price are two measures of output prices (that is, prices receivable). They differ in the way they treat non-deductible taxes on products, and producers’ subsidies on products.

    Example of comparison between producers’ price and the basic price:

    Producers’ price = Basic Price

    • plus (Producers’) non-deductible taxes on products
    • minus (Producers’) subsidies on products.

    Neither the producers’ nor the basic price includes any amounts receivable in respect of consumption taxes, such as the Goods and Services Tax, or similar deductible taxes. The difference between the two is that to obtain the basic price, any other tax payable per unit of output is deducted from the producers’ price while any subsidy receivable per unit of output is added.

    In the context of the Australian PPIs, the output price indexes measure changes in basic prices. Output is recorded at basic prices; any tax on the product actually payable on the output is treated as if it were paid by the purchaser directly to the government instead of being an integral part of the price paid to the producer. Any subsidy on the product is treated as if it were received directly by the purchaser and not the producer. The basic price measures the amount retained by the producer and is, therefore, the price most relevant for a producer's decision-making.

    Footnotes

    1. The Goods and Services Tax (GST) is excluded from all the prices recorded in the PPI because it is deductible on business to business transactions.

    Use of price indexes in National Accounts component aggregates

    In the Australian economy, millions of economic transactions take place every day involving the production and sale of goods and services (products). The monetary value of each of these transactions is a product of the quantity produced or sold at a price per unit. In a particular period, the total value of all transactions taking place in an economy is simply the sum of the individual transaction values in that period. This is referred to as the current price value.

    The calculation of Gross Domestic Product (GDP) using the income approach is compiled only in current prices and does not directly utilise price indexes; proxy volume estimates are produced for this approach using the implicit price deflator from the expenditure account (the implicit price deflator is detailed in Chapter 4 General Compilation Methodology, National Accounts and Balance of Payments - Derived Measures).

    The suite of ABS Price Indexes used in compiling the Australian National Accounts are not the only mechanisms used to derive volume measures. Other techniques include direct volume measurement and the use of quantity revaluation (i.e. multiplying current period quantities by a reference period unit value) in calculating volumes of homogeneous export products such as wheat and coal). Quantity revaluation can be seen as conceptually consistent with the action of deflation using average unit values as opposed to price indexes. Average unit values can differ to equivalent price indexes due to changes in quality and composition.

    In some circumstances price indexes are combined to produce aggregate deflators (for example, combining a Wage Price Index component with a Producer Price Index component). These composite measures are required when the value aggregate from the Australian National Accounts has a broader scope than the contributing price indexes.

    For a more detailed explanation of these concepts, see Australian System of National Accounts: Concepts, Sources and Methods.

    ‘Gross Industry’ versus ‘Net Industry’ approach to defining scope

    The compilation of Australian National Accounts is conceptually done on a ‘Gross Industry Basis’, and this means that the scope of data collection includes all transactions that occur within an industry and transactions between that industry and other intersecting industries.  For example, transactions captured for a motor vehicle manufacturing gross industry index includes both the sales of the parts (this includes sales of parts to other businesses within the same industry) and the sales of the finished cars, even though the price change of the parts would be included in the price change of the finished cars.

    An alternative approach to the ‘Gross Industry Basis’ approach is the ‘Net Industry Approach’ which restricts the scope of collection to transactions that occur within the industry, and in effect, exclude intra-industry transactions in a manner similar to a set of consolidated accounts of a group of enterprises.

    The PPIs are recorded on a ‘Gross Industry Basis’ to ensure consistency with the Australian System of National Accounts compilation processes.

    Input and Output price indexes

    Input price indexes

    The valuation basis for transactions covered by an input price index is purchasers’ prices.

    Purchasers’ prices are inclusive of non-deductible taxes on products, and transport and trade margins (that is, the prices recorded in the index should be the actual price paid by the user which relates to the price of products delivered into store, delivered on site, etc.).

    Input price indexes measure the average change in the prices of products used in the production process. These products or intermediate inputs to the production process are products produced elsewhere in the domestic economy or are imported. Primary inputs such as land, labour and capital are excluded from the Producer Price Indexes.

    Output price indexes

    The preferred valuation basis for the transactions covered by an output price index is at basic prices, although purchasers’ prices may be used when valuation at basic prices is not feasible.

    Both basic and producer prices are prices that exclude transport and trade margins. The distinction between basic and producer prices relates to the treatment of taxes and subsidies on products are:

    • basic prices are prices before taxes on products are added and subsidies on products are subtracted.
    • purchasers’ prices include, in addition to basic prices, taxes less subsidies on products (excluding value added taxes. The point at which prices are measured is ex-factory, ex-farm, ex-service provider, etc.).

    The main difference between basic and producer prices is generally any per unit subsidy that the producer receives. However, on occasions producer prices may have to be used when information on subsidies is not available. In most instances, producers in the Australian economy do not receive subsidies, in which case the producer prices and basic prices will be the same.

    The suite of ABS output price indexes measure the prices received by producers irrespective of whether their products are sold on the domestic market or as exports.

    Import and export prices

    Both the Import Price Index and the Export Price Index are valued using a free on board (f.o.b.) pricing basis. The value of products measured on an f.o.b. basis includes all production and other costs incurred up until the products are placed on board the international carrier for either export. For imports, freight and insurance charges involved in shipping goods from foreign to Australian ports are excluded from the prices used in the index, as are Australian import duties and taxes. Similarly, exports are priced on a f.o.b. basis at the main Australian ports of export. Exports are exempt from taxes on products.

    Coverage

    While coverage of goods producing industries is relatively comprehensive, the coverage of services industries is being progressively improved for both the Producer and International Trade Price Indexes. The expansion of new and emerging industries in both the Producer and International Trade Price Indexes is a key objective for the ABS to ensure both publications continue to effectively support the compilation of Australian National Accounts and Balance of Payments.

    Non-market goods and services

    Non-market activities involve products produced by non-profit institutions serving households (NPISHs) or government that are supplied free, or at prices that are not economically significant, to other institutional units or the community as a whole. These comprise both non-market services provided to individuals (such as health and education services) where a specific transaction can be identified but there is no economically significant price; as well as collective services (such as public administration and defence) where no individual transactions can be identified as the services are consumed by the entire population, indirectly, continuously and largely involuntarily. For more information on non-market activities refer to the Australian System of National Accounts: Concepts, Sources and Methods.

    Non-market activities have been historically excluded from the scope of Producer Price Indexes due to the fact that no market transaction takes place and therefore no change in transaction price can be measured. For this reason, most countries define non-market activities as falling outside the scope of Producer Price Indexes.

    The Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012 states that the basis of PPIs and ITPIs are to capture price movements for all products represented in the Input-Output (I-O) framework. Therefore, non-market activities should be captured. Where the non-market activity resembles a market activity (for example, education), the market price index may serve as a proxy for a non-market price movement

    However, some non-market activity where market equivalents are unavailable (for example, national defence) is valued at production cost, and there is no basis for constructing an explicit price index. The ABS will investigate how to reflect products such as non-market prices (as represented in the Australian National Accounts) within the Producer Price Index release.

    Classification

    Classifications are a set of defined groupings or categories, based on common relationships, into which all members of statistical units can be divided or arranged. These groupings or categories can be ordered systematically and must be mutually exclusive and exhaustive.

    The classification structure forms the index structure and determines which products from which industries of the economy are needed to construct price indexes. Further, the classification serves as the basic language allowing sources of value data and price indexes to have a direct concordance.

    Classifications enable an exact definition of which products are to be included in an index, and provide a meaningful and cohesive structure for reporting on price movements for different subsets of the price basket.

    The ABS uses many international and local classification systems.

    In the price index context, the availability of value data will dictate the lowest level of detail that might be possible. Although a classification may be conceived according to economic theory or user requirements using a top-down approach, in application the ABS collects data about individual products and then aggregates them according to the classification structure (i.e. a bottom-up approach).

    In application, products used in the compilation of the Producer and International Trade Price Indexes can be classified according to more than one classification structure.

    Please refer to Chapter 2, General Methodology of this release for detailed information on the current classification systems used in the compilation of the Producer and International Trade Price Indexes.

    Deflator used for Australian National Accounts and Balance of Payments

    PPIs and ITPIs are used to deflate values of a number of components in the Australian National Accounts, including industry inputs and outputs, sales, capital expenditure and inventory data to produce chain volume measures. The deflation process is integral to the compilation of Gross Domestic Product (GDP) and its components. In addition, ITPIs are used in the compilation of Balance of Payments Chain Volume Measures.

    Price deflation is achieved by dividing the current price value for a period (quarter or year) by a measure of the price component (usually in the form of a price index) for the same period. This technique revalues the current price value in the prices of a base period (in the Australian volume measures this is generally the previous year)¹.

    Revaluation of the current period values using earlier period prices is defined in the following format:

    \(\frac{V^t}{\big(\frac{P^t}{P^{t-1}}\big)}=P^{t-1}Q^t\)

      \(\Delta Q=\frac{P^{t-1}Q^t}{P^{t-1}Q^{t-1}}\)

    Where \(V\) refers to value, \(P\) refers to price, \(Q\) refers to quantity (or in National Accounts terminology, volume), and the superscripts \(t \space t-1\) refer to current and previous periods respectively.

    More information on the use of price indexes in the production of the Australian National Accounts can be found in Australian System of National Accounts: Concepts, Sources and Methods and Information Paper: Australian National Accounts, Introduction of Chain Volume and Price Indexes.

    Short-term indicator of inflationary trends

    While PPIs are of value in their own right, their use is enhanced when presented in the Final Demand framework. Final Demand measures the price change of products (goods and services) consumed with no further processing. For example, sugar cane is a preliminary product and used as an input into the production of raw sugar. In turn raw sugar is an intermediate product which is then used to produce the final product, refined sugar. Final Demand captures final products destined for final consumption, with no further processing. 

    An Illustration of the Final demand is presented below. The two examples show the three stages: preliminary, intermediate, and final for sugar and bread.

    Final Demand

    Illustration of the Final demand
    This image illustrates two examples for the three stages: preliminary products, intermediate products, and final products:
    1. Sugar cane is a preliminary product and used as an input into the production of raw sugar. In turn raw sugar is an intermediate product which is then used to produce the final product, refined sugar.
    2. Wheat is a preliminary product and used as an input into the production of flour. In turn flour is an intermediate product which is then used to produce the final product, bread.

    Escalation clauses within contracts

    Price indexes are also often used in contracts by businesses and government to adjust payments and/or charges to take account for changes in the prices of products. A PPI offers an independent indicator of the change in prices of the product under contract. Indexation is common in long-term contracts.

    IMPORTANT: While the ABS recognises that the price indexes it produces are used in this way, the ABS neither endorses nor discourages such use. The ABS does not advise, comment or assist in preparing or writing contracts. See Appendix 1 for a discussion on the ABS policy concerning the use of price indexes for contract indexation purposes.

    International organisations

    The ABS provides Australian PPIs and ITPIs to a range of international agencies, including the International Monetary Fund (IMF) and the Organisation for Economic Co-operation and Development (OECD) to enable economic monitoring and international comparisons. The provision of PPIs and ITPIs to the IMF also fulfils Australia’s obligations as part of the IMF Special Data Dissemination Standards (SDDS). The SDDS set out criteria concerning the statistics to be produced, their periodicity, release procedures etc. A brief overview of these standards can be found on the IMF Dissemination Standards Bulletin Board.

    Chapter 3 Technical Methodology

    Overview

    This section of the publication outlines the technical methodology used by the Australian Bureau of Statistics (ABS) to compile price indexes. The content of this section is focused on key price index concepts, including:

    • Price index theory and methodology
    • Sampling theory and methodology
    • Weighting theory and methodology
    • Imputation theory and methodology
    • Quality theory and methodology
    • Index review methodology
    • Re-referencing methodology

    The concepts contained within this section are explained in broad terms to provide users with a theoretical understanding of the technical side price index theory. The technical concepts explained in this section are explored further in practice in Chapter 4, General Compilation Methodology of this release.

    Price index theory

    Basic concept of price indexes

    Price indexes allow the comparison of two sets of prices, either over time (temporal index) or regions (spatial index) for a common product or group of products. There is extensive theory and information on price indexes available¹ and within this section, users will be provided with a detailed snapshot of price index theory that falls within the scope of the Producer and International Trade Price Indexes.

    A price index allows users to assess and compare sets of prices and the basis point for the development of a price index is to designate one set of prices as the ‘reference set’ and another set of prices as the ‘comparison set’. The designated reference set, or ‘reference price set’ is usually assigned an ‘index value’ of 100, which is the customary value used commonly by price statisticians².

    Exploring the concept of ‘Price Change’ and ‘Price Index’

    The value of an individual product is the product of price and quantity, that is:

    \(v^t=p^tq^t \space \space (3.1)\)

    where \(v\) is value, \(p\) is price, \(q\) is quantity and the superscript \(t\) refers to the periods at which the observations are made. For an output index, the value of concern is revenue. For an input index, the value of concern is expenditure.

    Decomposition of a change in a value can be illustrated using equation (3.1), as in the following example: 

    Suppose the price of tinned apples from a particular producer is $2.00 per 440g tin at a particular time. Suppose further that the price rises to $2.50 per 440g tin at a later time. The movement in the price of apples from the first to the later period is obtained from the ratio of the price in the second period to the price in the first period, that is $2.50/$2.00 = 1.25 or an increase of 25% in the price.

    If the producer sold exactly the same quantity of tinned apples in the two periods, the revenue from the sale (the value of the sale) would rise by 25%.

    However, if the amount sold in the first period was 1,000 tins, and the amount sold in the second period was 1,200 tins, the quantity would also have risen, by 1,200/1,000 = 1.20 or 20%. In these circumstances, the total revenue from sale of tinned apples increases from $2,000 in the first period (1,000 tins at $2.00 per tin), to $3,000 in the second period (1,200 tins at $2.50 per tin), an overall increase in revenue (value) of $1,000, or 50%. The overall increase in value is the product of the ratios of the change in price and the change in quantity (1.25 x 1.20 = 1.50).

    For an individual product, the ratio of the price in one period and the price in an earlier period is called a price relative. A price relative shows the change in price for one product only (e.g. the price of a tin of apples from one particular producer).

    In terms of the formula in equation 3.1:

    The ratio of the prices in the two periods, \(p^2\) and \(p^1\)

    ($2.50/$2.00 = 1.25) is the price relative \(\big(\frac{p^2}{p^1}\big)\)

    Now consider the case of price and quantity (and value) observations on many products. The quantity measurements can have many dimensions, such as number of units (e.g. tins), kilograms, metres, litres or even time (for services). Further, the quantities and prices of products are likely to show different movements between periods. Determining the respective movements in price and quantity between periods is the task of index numbers; to summarise the information on sets of prices and quantities into single measures to assist in understanding and analysing changes.

    In essence, an index number is an average of either prices or quantities. The problem is how the average should be calculated.

    More formally, the price index problem is how to derive numbers \(I^t_{PRICE}\) (an index of price) and \(I^t_{QUANTITY}\) (an index of quantity) such that the product of the two is the change in the total value of the products between the reference period \((0)\) and any other period \((t)\), that is:

    \(I^t_{PRICE}=\frac{P^t}{P^0}\), and

    \(I^t_{QUANTITY} = \frac{Q^t}{Q^0}\), then

    \(I^t_{PRICE} \times I^t_{QUANTITY}= \frac{P^t}{P^0}\times\frac{Q^t}{Q^0}\)

                                      \(=\frac{P^tQ^t}{P^0Q^0}\)

                                      \(=\frac{V^t}{V^0} \space \space \space (3.2)\)

    where \(P^t\)\(Q^t\) and \(V^t\) are respectively, price, quantity and value of all products in period \(t\) and \(P^0\)\(Q^0\) and \(V^0\) are respectively, their prices, quantities and values in period \(0\) (the reference period). Based on equation (3.1), \(V^t\) can be represented as:

    \(V^t=\sum^N_\limits {i=1}v^t_i\)

         \(=\sum^N_\limits {i=1}p^t_iq^t_i \space \space \space (3.3)\)

    that is, the sum of the product of prices and quantities of each product denoted by subscript \(i\).

    Major index formulae

    As stated earlier, one way to measure the price component of the change in value is by holding the quantities constant. In order to calculate the price index, the quantities need to be held fixed at some point in time. The initial question is what period should be used to determine the basket (or quantities).

    The options are to use:

    (i) The quantities of the first or earlier period.

    Estimating the cost of the basket in the second period’s prices simply requires multiplying the quantities of products purchased in the first period by the prices that prevailed in the second period. A price index is obtained from the ratio of the revalued basket to the total price of the basket in the first period. This approach was proposed by Laspeyres in 1871 and is referred to as a Laspeyres price index. It may be represented, with a base of 100.0, as

    \(I^t_{Laspeyres}=\frac{\sum^N_\limits {i=1}p^t_iq^0_i}{\sum^N_\limits {i-1}p^0_iq^0_i} \times 100 \space \space \space (3.4)\)

    (ii) The quantities of the second (or more recent) period. 

    Estimating the cost of purchasing the second period’s basket in the first period simply requires multiplying the quantities of products purchased in the second period by the prices prevailing in the first period. A price index is obtained from the ratio of the total price of the basket in the second period to the total price of the same basket valued at the first period’s prices. This approach was proposed by Paasche in 1874 and is referred to as a Paasche price index. It may be represented, with a base of 100.0, as:

    \(I^t_{Paasche}=\frac{\sum^N_\limits {i=1}p^tq^t}{\sum^N_\limits {i=1}p^0q^t}\times 100 \space \space \space (3.5)\)

    (iii) A combination (or average) of quantities in both periods³.

    In the absence of any firm indication that either period is the better to use as the reference, then a combination of the two is a sensible compromise. In practice this approach is most frequent in:

    a) the Fisher Ideal price index⁴, which is the geometric mean of the Laspeyres and Paasche indexes:

    \(I^t_{Fisher}=(I^t_{Laspeyres}\times I^t_{Paasche})^{\frac{1}{2}}\)

    \(= \sqrt {I^t_{Laspeyres} \times I^t_{Paasche}} \space \space \space (3.6)\)

    and

    b) the Törnqvist price index, which is a weighted geometric mean of the price relatives where the weights are the average shares of total values in the two periods, that is

    \(I^t_{Törnqvist}=\prod^n_\limits {i=1}\big(\frac{p^t_i}{p^0_1}\big)^{s_i}\times 100 \space \space \space (3.7)\)

    where

    \(s_i = \frac {1}{2}\bigg(\frac{v^0_i}{\sum^n_\limits{i=1}v^0_i}+\frac{v^t_i}{\sum^n_\limits{i=1}v^t_i}\bigg)\)

    is the average of the value shares for the \(i\)th product in the two periods.

    The Fisher Ideal and Törnqvist indexes are often described as symmetrically weighted indexes in that they treat the weights from the two periods equally⁵.

    The Laspeyres and Paasche formulae are expressed above in terms of quantities and prices. In practice quantities might not be observable or meaningful (for example, how would the quantities of legal services, public transport and education be measured?). Thus in practice the Laspeyres formula is typically estimated using value shares to weight together price relatives; this is numerically equivalent to the formula (3.4) above.

    To derive the price relatives form of the Laspeyres index, multiply the numerator of equation (3.4) by  \(\frac{p^t_i}{p^0_i}\) and rearrange to obtain:

    \(I^t_{Laspeyres}=\sum^n_\limits{i=1}\bigg(\frac{p^t_i}{p^0_i}\bigg)\frac{P^0_1q^0_1}{\sum^n_\limits{i=1}p^0_iq_i^0}\)

                   \(=\sum^n_\limits{i=1} \bigg(\frac{p^t_i}{p^0_i}\bigg) s^0_i \space \space \space (3.8)\)

    where \(s^0_i\) represents the value share of product i in the reference period.

    \(s^0_i=\frac{p^0_iq^0_i}{\sum^n_\limits{i=1}v^0_ip^0_iq^0_i} \space \space \space (3.9)\)

    3.15 To derive the price relatives form of the Paasche index, multiply the denominator (3.5) by \(\frac{p^t_i}{p^0_i}\) and rearrange to obtain:

    \(I^t_{Paasche} = \Bigg(\frac{\sum^n_\limits{i=1}p^t_iq^t_i}{\sum^n_\limits{i=1}p^0_iq^t_i\frac{p^t_i}{p_i^t}}\Bigg)\times 100 = \frac{1}{\sum^n_\limits{i=1}\frac{p^0_i}{p^t_i}}\bigg(\frac{\sum^n_\limits{i=1}p^t_iq^t_i}{p^t_iq^t_i}\bigg)\times100 \space \space \space (3.10)\)

    Which may be expressed as:

    \(I^t_{Paasche}=\frac{1}{\sum^n_\limits{i=1}\big(\frac{p^0_i}{p^t_i}\big)\times S^t_i} \times 100 \space \space \space (3.11)\)

    The important point to note here is that if price relatives are used then weights derived from value shares must also be used. On the other hand, if prices are used directly rather than in their relative form, then the weights must be derived from quantities.

    An example of creating index numbers using the above formulae is presented in Table 3.1 below.

    Table 3.1 Compiling Price Indexes over two periods
    ItemPrice ($)QuantityExpenditure ($)Expenditure sharesPrice relatives
    White Fresh Bread (loaves)2.902 0005 8000.39321.0000
    Apples (kg)5.505002 7500.18641.0000
    Beer (litres)8.002001 6000.10851.0000
    LCD TV (units)1 200.0022 4000.16271.0000
    Jeans (units)55.00402 2000.14921.0000
    Total  14 7501.0000 
    White Fresh Bread (loaves)3.002 0006 0000.42201.0345
    Apples (kg)4.504502 0250.14240.8182
    Beer (litres)8.401301 0920.07681.0500
    LCD TV (units)1 100.0033 3000.23210.9167
    Jeans (units)60.00301 8000.12661.0909
    Total  14 2171.0000 
    Index formulaPeriod 0Period t   
    Laspeyres (no.)100.098.5   
    Paasche (no.)100.097.6   
    Fisher (no.)100.098.1   
    Törnqvist (no.)100.098.0   

    The following illustrate the index number calculations:

    (a) Laspeyres

    \(= (0.3932 \times 1.0345) + (0.1864 \times 0.8182) + (0.1085 \times 1.0500) + (0.1627 \times 0.9167) \\+ (0.1492 \times 1.0909) \times 100 \\= 98.51\)

    (b)Paasche

    \(= 1/((0.4220 \times 1.0345) + (0.1424 \times 0.8182) + (0.0768 \times 1.0500) + (0.2321 \times 0.9167)\\ + (0.1266 / 1.0909)) \times 100 \\ = 97.61\)

    Fisher

    \(= (98.51 \times 97.62)^{1/2} \\= 98.06\)

    (c) Törnqvist best calculated by first taking the logs of the index formula
    \(= 1/2 \times (0.3932 + 0.4220) \times ln(1.0345)\)
    \(+ 1/2 \times (0.1864 + 0.1424) \times ln(0.8182)\)
    \(+ 1/2 \times (0.1085 + 0.0768) \times ln(1.0500)\)
    \(+ 1/2 \times (0.1627 + 0.2321) \times ln(0.9167)\)
    \(+ 1/2 \times (0.1492 + 0.1266) \times ln(1.0909)\)
    \(= -0.0199\)

    and then taking the exponent multiplied by 100
    \(= e^{-0.0199} *100\)
    \(= 98.03\)

    In Table 3.1 the different index formulae produce different index numbers and thus different estimates of the price movements. Typically the Laspeyres formula will produce a higher index number than the Paasche formula, with the Fisher Ideal and the Törnqvist of similar magnitude falling between the index numbers produced by the other two formulae. In other words the Laspeyres index will generally show a higher (lower) price rise (fall) than the other formulae and the Paasche index a lower (higher price rise (fall))⁶.

    Generating index series over more than two time periods

    Most users of price indexes require a continuous series of index numbers at specific time intervals. There are two options for applying the above formulae when compiling a price index series:

    (i) select one period as the reference and separately calculate the movement between that period and each other period, which is called a direct index, or
    (ii) calculate the period to period movements and chain link these (i.e. calculate the movement from the first period to the second, the second to the third with the movement from the first period to the third obtained as the product of these two movements).

    The calculation of direct and chain linked indexes over three periods (0, 1, and 2) using observations on three products, is shown in Table 3.2. The procedures can be extended to cover many periods.

    Table 3.2 Constructing price index series
    ItemPeriod 0Period 1Period 2
    1101215
    2121314
    3151718
    1201712
    2151516
    310128
    Index formula
     Laspeyres
      Period 0 to 1100.0114.2 
      Period 1 to 2 100.0112.9
      chain100.0114.2128.9
      direct100.0114.2130.2
     Paasche
      Period 0 to 1100.0113.8 
      Period 1 to 2 100.0112.3
      chain100.0113.8127.8
      direct100.0113.8126.9
     Fisher
      Period 0 to 1100.0114.0 
      Period 1 to 2 100.0112.6
      chain100.0114.0128.3
      direct100.0114.0128.5

    In this example, the Laspeyres Chain Index for period 2 is calculated as follows:

    \((114.2/100) * (112.9/100) * 100 \\= 128.9\)

    The Paasche Chain Index for period 2 is calculated as follows:

    \((113.8/100) * (112.3/100) * 100 \\= 127.8\)

    The Fisher Chain Index for period 2 is calculated as follows:

    \((114/100) * (112.6/100) * 100\\ = 128.3 \)

    OR

    \((128.9 * 127.8)^{1/2} \\= 128.3 \)

    The direct Laspeyres formula has the advantage that the index can be extended to include another period’s price observations when available, as the weights (quantities or value shares) are held fixed at some earlier period. On the other hand, the direct Paasche formula requires both current period price observations and current period weights before the index can be extended.

    Unweighted or equal-weight indexes

    In some situations it is not possible or meaningful to derive weights for each price observation. This is typically so for a narrowly defined product grouping in which there might be many sellers (or producers). Information might not be available on the overall volume of sales of the product or for the individual sellers or producers from whom the sample of price observations is taken. In these cases it seems appropriate not to weight, or more correctly to assign an equal weight, to each price observation. It is a common practice that the price indexes at the lowest level (where prices enter the index) are calculated using an equal-weights formula, based on arithmetic means or a geometric mean.

    Suppose there are price observations for \(n\) products in period \(0\) and \(t\). Then three approaches for constructing an equal weights index are⁷ ⁸:

    1. calculate the arithmetic mean of prices in both periods and obtain the relative of the second period’s average with respect to the first period’s average (i.e. divide the second period’s average by the first period’s average). This is the Dutot formula also referred to as the relative of the arithmetic mean of prices (RAP) approach:

    \(I^t_{Dutot}=\frac{\frac{1}{n}\sum^n_\limits{i=1}p^t_i}{\frac{1}{n}\sum^n_\limits{i=1}p^0_t} \space \space \space (4.12)\)

    2. for each product, calculate its price relative (i.e. divide price in the second period by the price in the first period) and then take the arithmetic average of these relatives. This is the Carli formula, also referred to as the arithmetic mean of price relatives (APR) approach:

    \(I^t_{Carli}=\frac 1{n}\sum^n_\limits{i=1}\frac {p^t_i}{p^0_i} \space \space \space (4.13)\)

    3. for each product calculate its price relative and then take the geometric mean⁹( of the relatives. This is the Jevons formula, also referred to as the geometric mean (GM) approach:

    \(I^t_{Jevons}=\prod^n_\limits{i=1}\bigg(\frac{p^t_i}{p^0_i}\bigg)^{\frac{1}{n}}\)

    \(= \frac{\big(\prod^n_\limits{i=1}p^t_i\big)^{ \frac 1{n}}}{\big(\prod^n_\limits{i=1}p^o_i)^{\frac{1}{n}}} \space \space \space (4.14)\)

    The following are calculations of the equal weight indexes using the data in Table 3.2. Setting period \(0\) as the reference with a value of 100.0, the following index numbers are obtained in period \(t\):

    Dutot (RAP) formula: \(113.5 = \frac{\frac1{3}(12+13+17)}{\frac1{3}(10+12+15)}\times 100\)

    Carli (APR) formula: \(113.9 = \frac1{3}(\frac{12}{10}+\frac{13}{12}+\frac{17}{15})\times 100\)

    Jevons (GM) formula: \(113.8= \space^3\sqrt{\frac{12}{10}\times\frac{13}{12}\times\frac{17}{15}}\times 100\)

    Theory suggests that the APR formula will generally show the largest estimate of price change, the GM¹⁰  the least and the RAP a little larger but close to the GM formula. Real life examples generally support this proposition¹¹, although with a small sample, as in the above example, different rankings for the RAP formula are possible depending on the prices.

    The behaviour of these formulae under chain linking and direct estimation is shown in Table 3.3 using the price data from Table 3.2. It is noted that the RAP and GM formulae are transitive (the index number derived by the direct method is identical to that derived by the chain link method), but not the APR.

    Table 3.3 Linking properties of equal weight index
    FormulaPeriod 0Period 1Period 2
    Relative of average prices (RAP)
     period 0 to 1100.0113.5 
     period 1 to 2 100.0111.9
     chain100.0113.5127.0
     direct100.0113.5127.0
    Average of price relatives (APR)
     period 0 to 1100.0113.9 
     period 1 to 2 100.0112.9
     chain100.0113.9128.6
     direct100.0113.9128.9
    Geometric mean (GM)
     period 0 to 1100.0113.8 
     period 1 to 2 100.0112.5
     chain100.0113.8128.0
     direct100.0113.8128.1

    Note: Uses the same price data as in Table 3.2 

    Unit values as prices

    A common problem confronted by index compilers is how to measure the price of products in the index whose price may change several times during an index compilation period. For example, in Australia petrol prices change almost daily at the terminal gate while the Producer Price Index (PPI) is quarterly. Taking more frequent price readings and calculating an average is one approach to deriving an average quarterly price. A more desirable approach, data permitting, would be to calculate unit values and use these as price measures¹².

    The unit value for a product for a specified period is the value divided by quantity transacted in the period. The use of unit values is problematic and is not generally recommended, since any change in product quality, product mix, or timing can seriously distort the average unit price. However, for a highly volatile but narrowly defined product like petroleum, this method may be suitable.

    Where reference period prices and quantities are not the same period

    One practical issue with price index construction when using the Laspeyres approach is that it may not always be possible to obtain values at the desired reference period. For example, the values may only be available from an earlier period. In this situation, a value is price updated so that it is composed of quantities in period b (some period prior to period 0) valued at the price level of period 0. The Laspeyres index in this form is referred to as a Lowe Index. The Lowe index is used by most National Statistical Offices to compile official price indexes. The Lowe index is expressed as follows:

    \(\frac{\sum^n_\limits{i=1}p^t_iq^b_i}{\sum^n_\limits{i=1}p^0_iq^b_i} \times 100 \space \space \space (4.15)\)

    To chain or not to chain

    The use of fixed weights (as in a Laspeyres type formula) over an extended period of time is not a sound index construction practise. For example, weights in a Producer Price Index should be changed to reflect changes in production patterns or structural changes to the economy over time. Production patterns change in response to longer-term movements in relative prices, changes in preferences and the introduction of new products (and the displacement of other products).

    When adopting a Fixed Weighted Index formula two approaches are generally used. One is to hold the weights constant over as long a period as seems reasonable, starting a new index each time, the weights are changed. This means that a longer-term series is not available. The second is to update the weights more frequently and to chain, as discussed above, to produce a long-term series. The latter is the more common practice.

    The behaviour of the various formulae when chaining is explored below in table 3.4 by adding two more periods. In period 3, prices and quantities are returned to their reference period values and in period 4 the reference period prices and quantities are ‘shuffled’ between products. The period 3 situation is sometimes described as ‘time reversal’ and the period 4 situation as ‘price bouncing’¹³.

    Table 3.4 A closer look at chaining
    ItemPeriod 0Period 1Period 2Period 3Period 4
    1 Boys' sport socks1012151015
    2 Girls' sport Socks1213141210
    3 Men's socks1517181512
    1 Boys' sport socks2017122010
    2 Girls' sport socks1515161520
    3 Men's socks101281015
    period 0 to 1100.0114.2   
    period 1 to 2 100.0112.9  
    period 2 to 3  100.078.8 
    period 3 to 4   100.0107.5
    chain100.0114.2128.9101.6109.2
    direct100.0114.2130.2100.0107.5
    period 0 to 1100.0113.8   
    period 1 to 2 100.0112.3  
    period 2 to 3  100.076.8 
    period 3 to 4   100.093.8
    chain100.0113.8127.898.292.1
    direct100.0113.0126.9100.093.8
    period 0 to 1100.0114.0   
    period 1 to 2 100.0112.6  
    period 2 to 3  100.077.8 
    period 3 to 4   100.0100.4
    chain100.0114.0128.399.9100.3
    direct100.0114.0128.5100.0100.4

    Under the three formulae, the index number under direct estimation returns to 100.0 when prices and quantities of each product return to their reference period levels. However, the chained index numbers do not (although the chained Fisher Ideal index might generally be expected to perform better than the chained Laspeyres or Paasche).

    There are obvious attractions in frequent chaining. However, chaining in a fixed-weight index can lead to biased estimates. This can occur if there is seasonality or cycles in the price and chaining coincides with the top and bottom of each cycle. For this reason, it is generally accepted that chaining should not be done at intervals of less than one-year l. The conceptual underpinning of chaining is that the traditionally expected inverse relationship between prices and quantities actually applies in practise (i.e. growth in quantities is higher for those products whose prices increase less in relative terms).

    Handling changes in price samples

    All the index formulae discussed above require observations on the same products in each period. In some situations it may be necessary to change the products or outlets included in the price sample or, if weights are used, to re-weight the price observations. Examples of changes in a price sample include: a data provider goes out of business; or the sample needs to be updated to reflect changes in the market shares of providers; to introduce a new provider; or to include a new product.

    It is important that changes in price samples are introduced without distorting the level of the index for the price sample. This is usually done by a process commonly called 'splicing'. Splicing is similar to chain linking except that it is carried out at the price sample level. An example of handling a sample change is shown in table 3.5, for equal weighted indexes assuming a new provider is introduced in period \(t\). A price is also observed for the new provider in period \(t-1\) . The inclusion of the new provider causes the geometric mean to fall from $5.94 to $5.83. We do not want this price change to be reflected in the index but we do want to capture the effect of provider 4’s price movement between period \(t-1\) and \(t\).

    Table 3.5 Change in sample - Introducing a new respondent
    RespondentPeriod 0Period t-2Period t-1Period 0Period t-2Period t-1
    Respondent 14.005.506.001.0001.3751.500
    Respondent 24.504.505.001.0001.0001.111
    Respondent 35.005.507.001.0001.1001.400
    Geometric mean (GM)4.485.145.941.0001.1481.326
    Respondent 14.006.006.501.0001.5001.625
    Respondent 24.505.005.501.0001.1111.222
    Respondent 35.007.007.001.0001.4001.400
    Respondent 40.005.506.001.0001.3261.447
    GM (all items) 5.836.221.0001.3261.416
    GM (matched sample) 5.946.30   

    In the case of the arithmetic mean of price relatives and geometric mean formulae, this is done by:

    • setting the previous period price relative for period \(t\) for the new provider (4) equal to the average of the price relatives of the three providers included in period \(t-1\) (1.326)
    • applying the movement in provider 4’s price between period \(t-1\) and \(t\) to derive a price relative for period \(t \space (6.00/5.50\times 1.326=1.447)\).

    For these two formulae, the average of the price relatives is effectively the index number, so the geometric mean index for period \(t-1\) is 132.6 and for period t is 141.6.

    In the case of the relative of the arithmetic mean of prices formula (RAP) formula, the method is similar but prices are used instead of price relatives. The RAP formula uses the arithmetic mean of prices (not the arithmetic mean of the price relatives). The index for RAP can be calculated from the period to period price movements:

    • between the reference period and period \(t-1\) , the movement in the average price was 1.333 (6.00/4.50) without the new provider
    • between period \(t-1\) and \(t\), the movement in the average price was 1.063 (6.25/5.88) including the new provider in both periods

    Thus the index for period \( t\) is 141.7 (1.333 1.063 100).

    Choosing an index number formula

    As different index number formulae will produce different results, there is a need for some investigation to determine which formulae are more appropriate. Two main approaches have been used, such as the evaluation of the performance of the formulae against a set of predetermined desirable mathematical properties or tests, the so-called 'axiomatic' approach and the economic approach.

    Footnotes

    ¹ The literature on price indexes is extensive. The intention of this chapter is to present a broad overview of the theory drawing heavily on documents that are in many cases overviews themselves as well as presenting an ABS perspective. For a detailed consolidation of producer price index theory and internationally recommended practices, see the Producer Price Index Manual, Theory and Practice (International Labour Organization (ILO), International Monetary Fund (IMF), Organisation for Economic Cooperation and Development (OECD), Statistical Office of the European Communities (Eurostat), United Nations Economic Commission for Europe (UNECE), and the World Bank, 2004). Available online: http://www.imf.org/external/np/sta/tegppi/. This chapter draws heavily on material from that manual. 

    ² By convention, the initial value for an index series is made equal to 100.0 

    ³ To quote Fisher (1922, p. 45) "… any index number implies two dates, and the values by which we are to weight the price ratios for those two dates will be different at the two dates. Constant weighting (the same weight for the same product in different years) is, therefore, a mere makeshift, never theoretically correct, and not even practically admissible when values change widely." 

    ⁴ The use of the geometric mean of the Laspeyres and Paasche indexes was first proposed by Pigou in 1920 and given the title 'ideal' by Fisher (1922). 

    ⁵ Footnote 5 See Diewert (1993) for a discussion of symmetrical averages.

    ⁶ Footnote 6 The relationship between the Laspeyres and Paasche indexes holds while ever there is a 'normal' relationship (negative correlation) between prices and quantities, that is, quantity falls (rises if price rises (falls) between the two periods. 

    ⁷ Footnote 7 Use of the RAP approach was first suggested by Dutot in 1738, the APR approach by Carli in 1764 and the geometric mean by Jevons in 1865 (see Diewert (1987)). Fisher (1922) described the RAP approach as the 'simple aggregative'. These are not the only possible formulae – another formula often mentioned in the literature is the harmonic mean. The harmonic mean of price relatives is given by the inverse of the arithmetic averages of the inverses of the relatives of the individual product prices, that is: \(\frac{1}{\frac1n\sum^n_\limits {i=1}\frac{p^0_i}{p^t_i}}\). The harmonic mean is equal to or lower than the geometric mean. Fisher (1922) also discusses use of the median and mode.

    ⁸ The implicit weights applied by the three formulae are equal reference period quantities (RAP), equal reference period values (quantities inversely proportional to reference period prices) (APR) and equal value shares in both periods (GM).

    ⁹ The geometric mean of \(n \) numbers is the nth root of the product of the numbers. For example, the geometric mean of 4 and 9 is 6\((6=\sqrt{4\times9})\), while the arithmetic mean is 6.5 \((6.5=(4+9/2)\). Although the geometric mean has been presented in terms of price relatives, the same result is obtained by taking the ratio of the geometric means of prices in each period, that is: \(\frac{\big(\Pi P_{it}\big)^{\frac1N}}{\big(\Pi p_{io}\big)^{\frac1N}}\)

    ¹⁰ For a mathematical proof of this see Diewert (1995). The unweighted indexes will all produce the same result if all prices move in the same proportion (have the same relative). In addition, the RAP and APR will produce the same index number if all reference period prices are equal. In general, the RAP formula is expected to produce index numbers above but reasonably close to the GM. Diewert also refers to other studies that compare real world results for elementary aggregate formulae. 

    ¹¹ For example, Woolford (1994) calculated these indexes for 23 fresh fruit and vegetable elementary aggregates of the Australian CPI over the period June 1993 to June 1994. He found that the GM produced the lowest increase in 16 of the 23 elementary aggregates and the APR produced the highest increase for 19 of the elementary aggregates. The RAP formula produced the middle estimate for 13 of the elementary aggregates. Combining the elementary aggregates to produce the fresh fruit and vegetables index, the index compiled using the APR estimates was 4.7% higher than the index based on GM estimates and the RAP was 1.7% higher than the index based on GM. 

    ¹² See Diewert(1995) for further discussion of unit values.

    ¹³ Szulc (1983) applied the term “price bouncing” to situation 3. 

    Sampling theory and methodology

    The volume and complexity of the available transactions from which to obtain prices means that it is not possible to collect prices from every provider and for every product or to take into account every price at which products are sold. Consequently, it is necessary to adopt a sampling approach to obtain transaction prices for representative products from selected businesses.

    This section will provide a broad overview of sampling methods used by the ABS in the compilation of the Producer and International Trade Price Indexes.

    Sampling Methods

    There are two primary sampling methods used by the ABS:

    • Probability Sampling; and
    • Non-Probability Sampling


    Probability sampling

    Probability sampling is the selection of a sample of producers and products from a population of industrial activity in which each producer and product has a known chance of selection. Under this approach, all producers and products have a known probability (chance) of inclusion in the sample. The key benefits of probability sampling are that sampling design controls for sampling error and allows for its measurement. There are, however, disadvantages associated with this approach.

    The use of probability sampling requires identification of all units (e.g. producers and products) in all industries of the economy that are in-scope of the price index (known as the sampling universe). This requirement translates into the need for an up to date sampling frame of products. The practical difficulties in satisfying this requirement mean that there are high costs in the design, implementation, and ongoing administration of probability samples for price index purposes.

    Non-probability sampling

    Non-probability sampling is known as judgmental or purposive sampling, or expert choice, and samples are chosen by experts to be representative. In a price indexes context this involves index compilers selecting producers and products from which to obtain prices using available information on the relative importance of individual producers and products.

    A key benefit of non-probability sampling is that it can be used where the sample population is not known. However, it is not possible to produce a measure of sampling error for indexes compiled from non-probability samples. It is generally accepted that price indexes are an area of statistics where the risks in not using a probability sample are relatively low, as the diversity of price change charged by various producers over time is usually small.¹

    Sampling for the Producer and International Trade Price Indexes

    Non-probability sampling is used by the ABS to compile the Producer and International Trade Price Indexes.² This is primarily due to the lack of available data to undertake a probability sampling approach, which as explained above, requires a significant data sampling frame of products which is not available to the ABS.

    The non-probability sampling approach uses available data to build a picture of the overall market for a particular industry. It is used to determine who the potential providers are, their relative importance, what particular products they sell, who they sell to, and their pricing policies. A range of information sources are used in the selection of products and corresponding businesses. These include market reports, industry associations, ABS industry census data and other related surveys, and discussions with potential providers. This information is used to develop a comprehensive understanding of the market.

    The index compiler uses this information to make appropriate judgements in the sample selection process.

    The effectiveness of the non-probability sampling approach depends on the index compiler’s ability to construct product samples that produce price movements that are representative of price movements of all in-scope products. This is achieved by: 

    • sampling products to represent the price movements for all the products which come within the scope of the particular price index
    • sampling providers to represent all the suppliers/users of the selected products. In general, the aim is to cover businesses which account for a high proportion of sales or purchases of the products in the index
    • sampling products from each provider to represent the whole product range within the selected product group
    • obtaining prices for each sampled product which best represent the price movements of all transactions in the selected product group.

    The Survey of Producer Prices

    The Survey of Producer Prices is the authorised survey tool administered by the ABS to collect the pricing data used in the compilation of the Producer and International Trade Price Indexes.

    The Survey of Producer Prices collects pricing data, reasons for price movements, and details regarding changes in product characteristics from producers that are enrolled within the survey. Enrolment into the survey is done on purposive basis and requires additional information regarding sales data, purchasing information to gauge representativeness and contact details for persons responsible for pricing information.


    The Survey of Producer Prices administered by 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 the ABS Privacy Policy and the Survey Participant Information - How The ABS Keeps Your Information Confidential.

    Selecting products for the survey

    The choice of individual products to be priced is made in consultation with providers to the Survey of Producer Prices. This process ensures that the sampled products are clearly identified and described, that they are representative of the price behaviour of the products they represent and confirms that the product specifications will be available for pricing in future periods.

    The representivity of the products in the price basket is regularly reassessed as over time specific types of products in the price basket appear and disappear. New products can appear because technical progress makes production of new products possible. Existing products often decrease in importance or disappear from the market altogether as new products appear. 

    Preparing the survey form

    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 and this process minimises the survey burden placed upon providers.

    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. Further, the 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.  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.

    The main criteria that form part of a specification are listed in Table 3.6 Below.

    Table 3.6 Items included in the creation of a specification
    ItemDetail
    Product name & serial numberName of the product/service. This should include information about the model/product range of the product/service.
    DescriptionIn addition to the product/service name, details. enhancements, add-ons need to be included in the description. For example, with cars, a number of add-on options are usually available (metallic paint, sun-roof, leather seats, non-standard alloy wheels), all of which affect the functionality/price of the product/service.
    Size of transaction (quantity data)The amount (quantity) of products/services sold, and whether volume discounts apply.
    Class of CustomerSome 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 saleUnits used in describing the product (for example, kilograms, litres, box for x amount etc).
    DiscountsMany companies offer trade, volume, competitive, or preferred customer discounts. All applicable discounts should be described, including value of the discount.
    Transport termsWhether transport costs are included and a description of how the products will be collected or delivered.
    CurrencyCurrency the transaction will be traded in.
    PricePrice of the product/service

    For some industries, a specification for a particular product may not be appropriate, and alternative pricing methods are required, these are explained below.

    Returning the Survey form

    The Survey of Producer Prices primarily uses a mail out-mail back tailored survey questionnaire; however, the ABS provides providers with the ability to submit the survey questionnaire in electronic format.

    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.

    The ABS is 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 moving towards an online survey collection for the Survey of Producer Prices when possible.

    Supplementary data sources

    While the ABS sources the majority of its pricing data for the Producer and International Trade Price Indexes from the Survey of Producer Prices, other data sources are used to supplement the quarterly price collection.

    Compilation of the Producer and International Trade Price Indexes uses data from other internal ABS sources in addition to that collected in quarterly survey forms.

    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). In the cases where internet prices reflect actual transaction prices the ABS will use this data to supplement its price samples. In some cases, the ABS purchases data from third parties, particularly when measurement of prices for groups of products requires additional specialist skills, such as bills of quantity data produced by quantity surveyors for the Outputs of the construction industry Producer Price Indexes.

    Frequency of data collection

    Most individual products priced in the Producer and International Trade Price Indexes 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 daily commodity spot prices are collected.

    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. For example, education prices increases occur annually, hence prices are collected once a year.

    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.

    To mitigate short-term external influences (for example, extreme weather, labour stoppages, seasonality), the ABS spreads the pricing points 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.

    Pricing

    Types of prices

    There are many different pricing types collected by the ABS through the Survey of Producer Prices and this section will explore the different pricing types currently in scope of the Producer and International Trade Price Indexes.

    Transaction Prices

    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.

    The Producer and International Trade Prices 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

    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.

    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. 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

    Spot market pricing (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 incorporate 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

    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

    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. The counterpart pricing methodology is employed whenever a purchaser’s price is represented by a basic price, or vice versa.

    Please 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.

    Model Pricing

    Model pricing is an approach adopted to measure products that are unique in nature, i.e. a product that is only manufactured once to the specification of a customer. 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.

    Transfer Pricing

    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 affect an unspecified income payment or capital transfer.

    Please refer below for issues relating to transfer pricing.

    General application

    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 use 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 (see below).

    International Trade perspective

    The Import Price Index measures the price of merchandise that is imported into Australia. A transaction is in scope of the Import Price Index 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 Import Price Index.

    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 the 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 and the 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 Import Price Index cannot determine a price movement for one-off purchases, the Import Price Index is consistent with the compilation of both the Australian National Accounts and the Balance of Payments statistics.

    Issues for consideration

    Application of discounts

    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 and the full level of discounts offered to major customers may only be known to senior company officials.

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

    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).

    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).

    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.

    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.

    The use of a personal interview 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).

    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.

    There are a number of additional sources of information that are useful in revealing the existence of (or changes to) discounts:

    • Industry and media reports – coverage on discounting, annual reports and competitive pricing for major products or product types is often freely available online. Intelligence from online resources can help determine competitive price discounting, as well as other price influences.
    • Market research - 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.

    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.

    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.

    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.

    Application of rebates

    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.

    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.

    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.

    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).

    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.

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

    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.

    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.

    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.

    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.

    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 below: Purchases of stainless steel

    Reference PeriodPriceQuantityValue% change in price from previous quarter
    Year 1(T)$ per tonnetonnes$'000%
    Quarter 1380570216.6 
    Quarter 2420590247.810.5
    Quarter 3460560257.69.5
    Quarter 4510590300.910.9
    Total 2 3101 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 PeriodPriceQuantityValue% change in price from previous quarter
    Year 2 (T+1)$ per tonnetonnes$'000%
    Quarter 1560660369.6 
    Quarter 1 (with rebate)318,455/660 = 482.5660369.6-51.145 = 318.455-5.4
    Quarter 2610660402.626.4

    In the Producer and International Trade Price Indexes, 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.

    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 the 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.

    Approaching unique products

    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.

    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.

    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.

    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.

    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.

    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.

    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.

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

    Approaching Transfer Pricing

    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 include a transfer price in the Producer and International Trade Prices when the price behaviour is confirmed to represent true market transactions.

    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 System of National Accounts and the Balance of Payments and International Investment Position Manual Sixth Edition, frameworks.

    Footnotes

    ¹ For example, Dalén, J (1998) ‘‘Studies on the Comparability of Consumer Price Indices’’, in International Statistical Review, Vol. 66, No. 1, pp. 83–113 and de Haan, J and E. Opperdoes, and C. Schut (1999) ‘‘Item Selection in the Consumer Price Index: Cut–off Versus Probability Sampling’’, in Survey Methodology, Vol. 25, No. 1, pp. 31–41. 

    ² Non–probability sampling is also used in the Consumer Price Index (CPI).

    Weighting theory and methodology

    The weights used to compile price indexes determine the impact a particular price change will have on the overall index. This section of this release outlines the weighting methodology and sources adopted by the ABS for the Producer and International Trade Price Indexes.

    Basic Price Index Structure

    A diagrammatic overview of the typical structure of a price index is provided in Figure 3.1. At the top is the total value of products represented by the index. This is progressively divided into finer product groupings, following the structure of the classification until, at the lowest level, there are samples of prices for individual products. These highly detailed price samples are called elementary aggregates. Indexes are only published down to the regimen level as this is the level at which the structure and weights remain fixed between index reviews.

    Figure 3.1 Example of a general index structure and the Output of manufacturing industries index structure

    Figure 3.1 Example of a general index structure & the Output of manufacturing industries index structure
    Figure 3.1 Example of PPI and ITPI structures
    This diagram includes two pyramids one outlining the general structure and a second providing an example of this structure using the output of the manufacturing industries.

    The first Pyramid outlines the general structure. This begins at the top of the pyramid with the root level highlighting the progression to more detail within the structure through the prices collected. This flow is as follows:
    Root level
    Upper level - Root +1
    Upper level - Root + k
    Regimen item level
    Lower levels
    Elementary aggregates
    Prices.

    The second pyramid applies this structure to the example of Output of the manufacturing industries. This flow from the top of the pyramid down is as follows:
    Manufacturing division
    Subdivisions
    Groups
    Regimen item level = ANZSIC Class (4 digit)
    Lower levels
    Elementary aggregates
    Prices.

    The division of products into finer product groupings is intended to reflect increasing levels of substitutability of the products in response to changes in relative prices.

    For an output price index, the index structure reflects substitutability in terms of production, reflecting how producers change their outputs in response to the prices they are receiving in the marketplace. For an input price index, the index structure reflects substitutability in terms of consumption, reflecting how producers change their inputs in response to the prices they are paying in the marketplace.

    Adding Weights to an Index structure

    The root level or elementary aggregate level of a price index is compiled by weighting price movements (or price relatives) between the reference period and current period by their shares of total value in the reference period. This is simply the alternative way of calculating a Lowe index.

    In practise, the value aggregate for a product in period t is calculated by multiplying the reference period value aggregate \(P^0 q^0\) by the price relative for period \(t (p^t/P^0)\). This is simply the product of the reference period quantity and the period t price. Summing the value aggregates in period t and dividing by the sum of the value aggregates in the reference period yields the Lowe price index.

    Price indexes measure the change over time in the total price of a fixed basket of products when considered in aggregate. For an input price index, the aggregate is of all products purchased while for an output price index the aggregate is of all products sold. It is important to note that the use of the term ‘fixed’ relates to the quantities underlying the reference period values (or more formally, the quantities in the reference period value aggregate) - it is, after all, the reference period quantities that are fixed in a Lowe index. Weights are expressed in terms of value shares because quantities are not meaningful or consistent across products. Further, value shares will change over time as the rate of price change varies across products.

    Weights should be updated regularly to ensure the index remains representative of the market structure.

    If held constant on a permanent basis, the weights would become less representative of the relative importance of products produced (or purchased) by producers the further the series moved away from the reference period. There would also be the problem of products that cease to exist and the entry of new products. Furthermore, the finer the level of detail, the less information that exists about the relative importance of products in the basket, which makes it more complicated to calculate weights at lower levels of the index.

    To reduce these problems, weighting practises vary by the level of aggregation. Three distinct practises arise:

    1. Weights for the regimen level and above (also known as upper level weights) in which the implicit quantity weights are fixed between index reviews.
    2. Weights for the index structure between the regimen level and the elementary aggregate level (also known as lower level weights) which are subject to change, dependent on the outcome of a formal review process
    3. Weights for the individual specifications within an elementary aggregate (also known as micro-index weights) which are updated as required to ensure the specifications remain representative.

    The role of classifications in weighting

    Classifications play a vital role in determining the weights for price indexes. A classification not only helps determine the appropriate scope of the price index (and hence inclusions and exclusions from the value to be covered) but plays a critical role in defining a common language. That is, the classification is the common language that is used to relate the price index structure to its underlying value data.

    The ABS use tools such as the Australian and New Zealand Standard Industry Classification to structure the Producer and International Trade Price Indexes on an industry basis, and further information on the applicable classification used for each Producer and International Trade Price Index can be found below.

    Industry Focus

    The Producer Price Indexes are structured and compiled on an industry basis and the structure of the output price indexes include both products primary to an industry, but also include secondary production products and therefore, the weights of output price indexes are inclusive of both primary and secondary product expenditure.

    Chain of Representativeness

    Price indexes are constructed using a sample of transactions for a range of product types to represent a broad range of economic activity. This “chain of representativeness” is discussed in more detail in the Sampling section. One outcome of using sampling is that the selected products represent not only themselves but also other related products not included in the selected sample.

    Some industries and products will have very small relative importance in terms of their share of total production. It may not be feasible to maintain a sample for these products, however their weight is still included in the overall index structure. This is achieved through the inclusion of empty node components. When empty node components are included in the index structure, they are weighted according to the value of the output (or input if it is an input price index) of the products represented by the component. When the index is compiled, the price movement of an empty node is derived by using the weighted average price movements of the sampled components within the product group to which the empty node belongs. This approach has the advantage of simplifying the inclusion of a component if it becomes feasible to collect a sample for that component.

    An example of the empty node approach is illustrated in Figure 3.2 below, for Australian and New Zealand Standard Industry Classification Class 0139 Other Fruit and Tree Nut Growing (see Figure 6.2). In the example, not all products within the industry classification are included in the sample, specifically Other edible nuts (excluding Peanuts) nec. The value of Other edible nuts (excluding Peanuts) nec was $163.2m (2012-13), or 29.2% of the total value of Class 0139 Other Fruit and Tree Nut Growing. The value (price movement) of the empty node is derived by using the average price movements of the sampled components within the product group; which in this example would be derived from the price movements for bananas, orchard fruit and almonds and macadamias.

    Figure 3.2 Empty node approach

    Figure 3.2 Empty node approach
    Figure 6.2 The empty node approach
    The diagram outlines the structure of index aggregation for 013 Fruit and Tree Nut Growing.
    The top of the structure begins with the following sub components:
    0131 Grape Growing
    O132 Berry Fruit Growing
    0134 Apple and Pear Growing
    0135 Stone Fruit Growing
    0136 Citruse Fruit Growing
    0139 Other Fruit and Tree Nut Growing ($559.1m)
    0139 Other Fruit and Tree Nut Growing is highlighted and further sub components of this item are then outlined in the diagram:
    Bananas ($5.8m)
    Orchard fruit nec ($144.3m)
    Almonds and macadamias ($245.8m)
    Other edible nuts (excluding Peanuts) nec ($163.2m)

    Determining the weight reference period

    The weighting structure of a price index plays a large part in determining the accuracy and reliability of the index. Key factors in selecting the period used to calculate the weights are:

    • The economic activity over the period should be reasonably normal/stable and representative of likely future activity
    • Close to the link period (the period where the weights are introduced to the index series).

    The weight reference period and the link period used in a price index formula are rarely the same period in practise. For reasons of stability and representativeness, the weight reference period is frequently a year or longer period. New weights are introduced during a specific period, known as the link period. For a Lowe price index, weights are price updated to account for price changes between the weighting period and the link period.

    For example, the Import Price Index is re-weighted each year using the most recent financial year data sourced from the ABS International Trade in Goods and Services publication. The updated data is incorporated into the Import Price Index in the September Quarter, which means that in the September quarter each year the weight reference period is updated to the previous financial year, and the weights are price updated to the September quarter to take into account the change in prices between the conclusion of the financial year each year and the three months ending the September quarter.

     In satisfying the stability and representativeness criteria presented above, weights for the Producer and International Trade Price Indexes are sometimes taken from multiple periods. This practise is followed in those instances where a single year’s data may not be adequate, either because of unusual economic conditions (such as introduction of a new tax system), volatility observed in the marketplace or insufficient sample sizes from survey data. In such cases, an average of several years’ data provides the best weight reference period as it reduces the sampling and seasonal variance of the production or sales data for a given size of the annual sample. For example, whereas the Import Price Index uses weighting data from the most recent financial year, the Export Price Index uses data from the previous two years due to the volatility observed in key export commodities.

    Frequency of weighting

    The ABS periodically updates the weights of its price indexes to reflect changes in market structure. The faster the change in an economy’s market structure, the more frequently the weights in the indexes are updated.

    Sourcing weighting data

    The data used to create weights for price indexes are taken from various internal and external sources by the ABS. This section will explore the different weighting sources for the different index levels for the Producer and International Trade Price Indexes.

    Upper-level weighting

    Upper level weights are the weights that apply to the components of a price index structure between the root level and the regimen level. The weights, at the root level including the weight of the regimen level, are fixed in terms of underlying quantities until an index redesign takes place.

    The majority of the Producer and International Trade Price Indexes use the Australian National Accounts or International Trade in Goods and Services as sources for upper level weights. For some Producer Price Indexes, the scope of activity covered by the price index does not align directly with the Australian National Accounts. This is particularly the case for the price index of Input to the house construction industry, which is weighted using a bills of quantity approach.

    Lower-level weighting

    Lower level weights are the weights that apply to the components of a price index structure below the regimen level down to the elementary aggregate. The weights, including the weight of the elementary aggregate (but not the price sample within the elementary aggregate) may be adjusted to reflect changes in either producer or purchaser behaviour in the market and hence changes in the relative importance of products in the basket. Furthermore, the effects of discontinued and new types of products can also be accommodated.

    Product Specification weighting

    The calculation of the broad price indexes starts with the measurement of the relative price change for an elementary aggregate, which represents the first level at which price observations are combined to calculate an index. At this level, weights are needed to combine individual price observations in order to calculate higher-level indexes. The elementary aggregate index covers all prices collected for one detailed product type. Each elementary aggregate is composed of price observations for products that are similar in terms of material composition, end use, and price behaviour.

    It is important that the weight for each price observation covers the value of all products that the individual transaction represents. That is, most price observations will have a weight that represents other products and transactions in addition to the value of the sampled product alone. Micro-index weights are frequently adjusted to account for the introduction of new product varieties within a product type (such as a unit of sale or new flavour). Similarly, they are adjusted to account for the removal of discontinued individual product lines.

    For example, consider an elementary aggregate for bottled beer for an output price index. The specifications within the elementary aggregate typically incorporate information on brewery, brand, bottle size and units of sale (such as 12 X750 ml bottles or 24 X375 ml bottles etc.). Through the process of sample selection, sampled products are selected to represent other products. A particular sampled product may be a best-selling brand of beer in a 24 X375 ml bottle carton; but the weight of the specification would include not only the value of sales of such a product but also the value of sales of other brand varieties sold by the particular brewery. The weight may also include the value of sales from other breweries.

    In calculating such a weight, it is necessary to know several critical pieces of information regarding the values of transactions. Continuing the bottled beer example from above, the following data are required:

    • the value of sales of the selected beer product (brewery, brand, size, units of sale)
    • the value of sales of other brands of the same size from the selected brewery
    • the value of sales of 24 X375 ml cartons of beer from other (non-sampled) breweries.

    In general, value data (either revenue or expenditure) are required for the sampled product and also for any other products that are within scope of the elementary aggregate. Determining such information requires the co-operation of sample providers. The ABS generally collects this information via a personal visit during the activity known as a sample review.

    The other key source of detailed product information used in micro-index weighting are industry associations, as described above for lower level weights.

    Challenges in weighting product specifications

    Determining value data at the product specification level is a difficult process that sometimes proves to be burdensome for sample providers. In addition, it can become an increasingly complex task to ensure that the micro-index weights are correctly maintained over time. Continuing the bottled beer example from above, the introduction of an immediately popular new brand (such as a boutique beer) requires collection of not only the sales revenue of the new product but also a measure of how the sales values of existing products have changed in response to the new competition. Collecting such information in a timely manner frequently proves difficult.

    Equal weighting formulae

    In the case where specification weighting might be difficult to achieve, an alternative is to adopt a micro-index formula where the sampled specifications have the same weight within an elementary aggregate. This process is currently applied to the Australian and New Zealand Standard Industry Classification  Class 0400 Accommodation Producer Price Index.

    Data sources currently employed by the ABS for weighting the Producer and International Trade Prices

    Australian National Accounts Input-Output (I-O) tables

    The key sources of data for upper level weights for the Producer Price Indexes are the Australian National Accounts I-O tables and a full overview of the I-O tables is provided above. The I-O tables are primarily used for the upper level weights for the Producer Price Indexes.

    In addition to broad data from I-O tables, other data sources used to construct the Australian National Accounts aggregates are frequently used in the estimation of lower level weights for Producer Price Indexes. The Australian National Accounts component data are generally more complete in terms of consistent coverage and valuation bases. The data used for lower-level weighting are at a more detailed level than published Australian National Accounts data.

    International merchandise trade data

    The key sources of data for upper level weights for the ITPIs are the values of imported and exported products from Australia’s international merchandise trade statistics. These data are compiled (on a trade basis) from information submitted by exporters and importers or their agents to the Department of Home Affairs.

    The conceptual framework used in compiling Australia's merchandise trade statistics can be found in International Merchandise Trade, Australia: Concepts, Sources and Methods.

    For lower level weights, data provided by the Home Affairs is coded to very detailed levels of the Harmonised System (HS) trade classification. This data is used to construct representative weights for the lowest level of classification.

    The use of International Merchandise Trade data for both upper and lower level weighting is described above. Data provided by Home Affairs is coded to very detailed levels of the Harmonised System (HS) trade classification. Value data at the product level is used to construct representative weights for the sampled products within the finest level of classification.

    ABS economic surveys

    ABS economic surveys are also used in the production of lower level weights for the Producer Price Indexes. These data typically provide information on type and characteristics of producers, as well as some detailed information on revenue. In addition, these ABS surveys frequently provide information regarding industry outputs in terms of quantity measures. Deriving lower level weights from these quantity data requires combination with measures of average prices.

    Examples of the use of ABS survey data for lower level weights include:

    • A range of revenue estimates from the program of Annual Integrated Collections are adopted to weight lower level components of the Services industry Producer Price Indexes.
    • A range of quantity, expenditure and revenue estimates from the Building and Construction Statistics program are adopted to weight the lower level components of a number of different Producer Price Indexes, including the Output of the Construction Industries.
    • Revenue estimates from the International Trade in Goods and Services are used in weighting the Services industry Producer Price Indexes, particularly regarding transport (freight) activities.

    Australian Taxation Office

    The Business Activity Statement is a tax return lodged with the Australian Taxation Office in respect of:


    The Business Activity Statement must be lodged by all registered businesses, including government entities for each tax period. Since Goods and Services Tax is levied on revenue from sales, the Business Activity Statement data provide information on output (revenue) by size and type of business. These aggregate data can be incorporated into lower level weights for a range of Producer Price Indexes.

    Bills of Quantity

    Bills of quantity are documents produced in the building industry by professionals such as quantity surveyors. These documents break construction projects down into elements or products, and then quantify the inputs required for each product. In this way the types and quantities of materials required can be established. The price of the quantity of each specific material is determined so that the materials can be represented in value terms rather than as quantities.

    The ABS use bills of quantity approach to select a basket of products to be priced each period and to derive weights for those products for its Construction Industries Producer Price Indexes.

    For the Input to the House Construction Industry Producer Price Index, the ABS employs quantity surveyors to undertake this exercise for a selection of typical or representative house designs (for example, brick veneer house 100m2, double brick house 180m2 etc.). Product values for different house designs are then weighted together based on the relative shares of the different house designs in total house construction. Products are then aggregated into broad product types. The fixed basket (and hence the upper level weights) is then determined using the values of the broad product types. The bill of quantities approach is refined further in practise by allowing the share of construction of different house types to vary by capital city.

    For the Output of the Construction Industry Producer Price Indexes, the bills of quantities approach is used as part of the process of determining lower level weights. Here the representative designs are not of houses but of residential and non-residential building types. Rather than restrict the bill of quantities to just building materials, the approach adopted in parts of the general construction price index includes work in place, which covers labour, plant and materials, plus margins.

    Administrative data

    A wide variety of administrative data on production values are available from public and private organisations and are now widely used by the Producer and International Trade Price Indexes to support lower level weighting. Examples of data obtained include: data for agricultural and mining activities, production and consumption of energy and outputs and consumption of transport services.  

    Industry associations

    Another source for weighting data is industry associations. Many associations conduct surveys of their membership that include detailed information on value of sales by product. Alternatively, where production of a type of product is dominated by one or two large firms, the market shares for these firms can be a source of weighting data. Both types of data are adopted for use in Producer Price Indexes, particularly for the Services Industries.

    Imputation theory and methodology

    Across all indexes, missing price observations occur on a regular basis and this could be due to factors such as:

    • temporary out of stock items,
    • discontinued items,
    • or seasonal elements.

    In any price reference period, these factors can make it impossible to obtain a price measure for a particular product.

    The ABS employs a number of imputation methods to address temporarily missing observations within price indexes. These include:

    • the imputation a movement for the product based on the price movement for all other products in the sample
    • the use the price movement from another price sample, or
    • repeat the previous period’s price of the product (also called carry forward method).


    These options are known as imputation.

    Their purpose is to calculate a price for the temporarily missing product. The aim of imputation is to provide prices such that the resulting movement in the price index is the same as would have been calculated had all prices been observed. In achieving such a result, it is necessary to make an assumption regarding the price behaviour of the temporarily missing product.

    Imputation from price sample

    The rationale for imputing a price movement from other products in the sample is that products are bought and sold in a competitive marketplace and in those cases where an individual product has not been observed in the current period, it is assumed that its price behaviour is reflected by similar products in the sample. The design of elementary aggregates to contain products that are homogeneous in terms of price behaviour (as noted above) ensures that the assumption underlying this method of imputation is generally robust.

    Imputing from other products in the sample is also mathematically equivalent to excluding the product, for which a price is unavailable in one period, from both periods involved in the index calculation. It strictly maintains the ‘matched sample’ concept.

    In order to impute a movement resulting from excluding the product it is necessary to construct a measure of price change from the previous period to the current period for those products common to both periods. This calculation is dependent upon the price index formula used for the elementary aggregate.

    When the elementary aggregate is compiled using a Laspeyres formula, it is first necessary to derive the implicit quantity shares underlying the weights of the matched products. This can be achieved by dividing the weight for each product by its reference period price.

     The resulting quantity shares for the matched products are then used to calculate the price change from the previous period to the current period.

    \(\Large s_{q,i}=\frac{\frac{w_i}{p^0_i}}{\sum_\limits {MATCHED} \frac{w_i}{p^0_i}}\)

    \(\large M^t_{t-1} = \frac{\sum_\limits {MATCHED}s_{q,i}p^t_i}{\sum_\limits {MATCHED}s_{q,i}p^{t-1}_i}\)

    \(\large \hat{p}_j^t=M^t_{t-1}\times p^{t-1}_j\)

    where \(S_{q, i}\) is the implicit quantity share in the reference period for matched product \(i\)\(w_i\) is the weight for matched product \(i\)\(p^0_i\)\(p_i^{t-1}\),\( p^t_i\) are respectively the reference period price, previous period price, and current period price for matched product \(i\) (at time t), \(M^t_{t-1}\) is the price movement between the previous and current period for the matched products, and \(\hat{p}^{t-1}_j\) is the imputed price for missing product \(j\) at time \(t\).

    An example of this calculation is shown in Table 3.7 below.

    Table 3.7 Example of imputation from other products in the price sample
     Reference Period Value ShareReference Period Price ($)Previous Period PriceCurrent Period Price
    Product A305812
    Product B60101620
    Product C1024n.a.
     Implicit quantitiesImplicit quantity shareShare x Previous Period PriceShare x Current Period Price
    Product A60.54.06.0
    Product B60.58.010.0
    Total  12.016.0
    Movement   1
     Current period Price after imputePrice relative after imputeWeight x relative 
    Product A122.472 
    Product B202120 
    Product C5.3332.66666726.66667 
    Laspeyres price index  218.6667 

    Imputation from another price sample

    The second approach to imputation for the Producer and International Trade Price Indexes is to use the price movement from another related sample or comparable product. This approach is used in cases where price changes from a comparable product (or products) from a similar type of provider can be expected to be similar to the missing product.

    Carry forward imputation

    The rationale for adopting a carry forward imputation is that failure to observe a price for a product reflects no transactions for the product, and hence there can be no price change. However, each product in the price sample represents similar products purchased and sold elsewhere in the marketplace, and such an assumption does not hold in most cases. Application of this method of imputation when transactions are actually occurring in a marketplace (but not observed by the sample) consistently biases the index towards zero (that is, biased downward when prices are rising and biased upward when prices are falling).

    It is for these reasons that the price statisticians apply this imputation mechanism only under specific conditions where it is known that failure to observe a transaction means that no transactions are occurring (such as where there is only one sale per year of a type of agricultural crop, for example, or where the price changes only once per year during annual price setting).

    Quality theory and methodology

    The objective of pure price indexes is to measure price change over time to constant quality. This is achieved by re-pricing an identical basket of products each period and ensuring the basket of products is unaffected by quality and quantity changes. This is often referred to as pricing to constant quality and an important element of the day-to-day role of price statisticians.

    The concept of quality is based on the notion of utility to the purchaser. Quality change is measured by reference to the expected value of the changes to the purchaser. While it is not always possible to achieve this in practice, it is the principal guideline in making decisions concerning quality change.

    In economic theory it is generally assumed that whenever a difference in price is found between products which appear to be physically identical, there must be some other factor, such as location, timing, conditions of sale etc., which is introducing a difference in quality. Otherwise it can be argued that the difference does not exist, as rational purchasers would always buy the lower priced products and no sales would take place at the higher price.

    However, underlying the economic theory are some strong assumptions which rarely hold true in the marketplace. The key assumption behind “different price means different quality” is that purchasers have
    perfect information and that they are free to choose between products offered at different prices.

    In most markets, purchasers do not have perfect information about existing price differences and may therefore inadvertently buy at higher prices. While it is true that most purchasers will search out lower prices, costs are incurred in the process. The lack of information about price differences may result in search costs being greater than price differences, in which case rational purchasers may be prepared to accept the risk that they are not in fact buying at the lowest price. The existence of this imperfect information in the marketplace is evident from the number of situations where buyers or sellers negotiate over prices.

    Even when purchasers are well informed, in practice they are not always free to choose the price at which they purchase. This situation arises because of price discrimination, whereby the seller is in a position to charge different prices to different categories of purchasers (for products that are otherwise identical). Price discrimination is a common practice in the marketplace as it enables sellers to increase revenues and profits.

    Complicating this observation is the difficulty that arises when purchasers can resell amongst themselves (that is, purchasers that buy at the lowest price can resell products to other purchasers). Under such circumstances price discrimination is less likely to occur. While this circumstance can occur for the sale of most products, this situation rarely arises for services, since it is usually impossible to resell services. Price discrimination is frequently practised in many of the transportation and business service industries for this very reason. Therefore, when different prices are charged to different purchasers it is essential to establish whether there are in fact any quality differences associated with the lower prices.

    The applicability of the underlying economic theory is tested when differences in price arise because there is insufficient supply. Such a situation typically occurs when there are two parallel markets. For example, there may be a primary domestic market and a secondary market for imports. If the quantities available in the domestic market are limited, there may be excess demand so that supplies may be imported. As a result, the price on the secondary market will tend to be higher. It is also possible that products from the secondary market are not only more expensive but of different quality.

    Therefore, prices statisticians are faced with a contrast between theory and practice: theory indicates that a difference in price means a difference in quality, but a difference in price may also arise due to lack of information, price discrimination by customer type, supply constraints and/or the existence of parallel markets. Thus, the existence of different prices does not always reflect corresponding differences in the qualities of the products.

    Defining Quality

    The term ‘quality’ embraces all those characteristics in a product that the purchaser values or from which it derives utility. Therefore, the problem is to identify those characteristics that purchasers value, to make an estimate of the value of those characteristics and to measure the change in those characteristics embodied in the product so that their effect can be removed when calculating price movements. When used in this context, ‘quality’ encompasses all attributes of a product, including quantity.

    Sets of products are available in the marketplace with physical characteristics which differ from each other. For example, potatoes may be old or new, red or white, washed or unwashed, loose or prepacked. Loose unwashed Russet Burbank potatoes (used for French fries) are a different quality of potato to washed, prepacked Atlantic potatoes (used for crisps).

    When sets of products are sufficiently similar to be considered the same generic type of product (such as a potato), but have sufficiently different characteristics that make them distinguishable from each other from an economic viewpoint, the products are said to possess different qualities.

    Not all differences in quality are attributable to differences in physical characteristics of products. Products with identical physical characteristics delivered to different locations, or at different times, are considered to have quality differences. Purchasers situated in one location frequently have different marginal utility from that of purchasers in other locations; hence, different locations may result in different qualities.

    Identical products provided at different times of the day (or year) must be treated as different qualities. An example of such a quality difference occurs with the supply of electricity. Electricity provided at peak times is considered to be of a higher quality than that provided at off peak; the very fact of a peak time shows that purchasers of electricity attach greater utility to the provision of electricity at these times.

    Quality differences may also be determined by a range of other non-physical attributes. Quality may be determined by conditions of sale, presence of free after sales service, guarantees for durable products, inclusion of delivery, methods for payment, and so forth.

    Frequently the precise product priced in one period is no longer available in the next period because either there has been some change in the characteristics of the product or else something new has taken its place. For price index purposes it is necessary to devise techniques to identify quality differences and eliminate their effect on prices from the calculations of price change for inclusion in the index.

    Why quality change is important when compiling price indexes

    The objective of pure price indexes is to measure price change over time to constant quality. This is achieved by re-pricing an identical product or service each period and ensuring the product or service is unaffected by quality and quantity changes. The dynamic nature of products and services, where differentiating and improving quality of products and services is a key element, pricing to constant quality cannot be achieved without the application of quality adjustments. A failure to price to constant quality would result in a pure price index that reflected price change and quality change.

    Adjusting for quality prevents distorted price statistics that can occur from unsuitable quality adjustments or incorrect application. Biases can arise from the inability to account for changes in quality over time.

    Quality adjustments create conceptual and practical challenges, the importance of correct procedures ensure that price statistics measure pure price change.

    The importance of pricing to constant quality is evident when the primary purpose of the Producer and International Trade Price Indexes is to support the calculation of volume measures in the Australian National Accounts and Balance of Payments. Pricing to constant quality results in the quality change being correctly reflected in the volume measures when deflation of current price estimates occurs.

    Dealing with Quality Change in Practice

    The real world of economic transactions is ever changing and dynamic. Frequently the product priced in one period is no longer available in the next period because either there has been some change in the characteristics or something new has taken its place. Specific varieties of products regularly appear then disappear. New products can appear because of advances in technology, making the production of these new products possible.

    Failure to account for quality changes would introduce a bias into the price index. Thus, if the qualities of products being compared are not identical, there are effectively two options:

    • to adjust the observed price of the old quality for the change in quality which has taken place (referred to as a quality adjustment) or
    • to treat the two qualities as if they were two separate products and obtain their prices in the periods in which they were not collected.

    The problem facing price statisticians is isolating and quantifying the direct effects of changes in the quality on products they are pricing in the fixed basket, to achieve an index of pure price change. However, the ABS has several options for quality adjustment available for index managers and further information on the methods are available below.

    Quality Adjustment in Practice

    Quality adjustment is defined as making a change in the price or price movement that accounts for the change in quality that affects the utility of the product.

    In compiling the Producer and International Trade Price Indexes, five situations and treatment methods are clearly defined when a product changes:

    • Overlapping sales - where there is at least one period when both qualities are on sale in the market at the same time
    • Non-overlapping sales - where one quality is replaced by another of different quality, but the two qualities have not been available in the market at the same time
    • Component approach - where there are some changes in the composition of a particular quality
    • Hedonics - where the different qualities are assumed to be functions of certain measurable characteristics or
    • Not directly comparable - where qualities are different, but no information exists to allow an explicit quality adjustment to be made.

    Overlapping Sales

    Overlapping sales arise where a particular product being priced is no longer available in the market place from one period to the next, but there is another similar product that has been, and continues to be, available in the same market as the initial product and is expected to be a substitute once it is discontinued.

    In this situation, provided the two products were sold side by side for some time in the same market and both were sold in reasonable quantities, the approach is to collect prices for both products at the one date and to assume that the difference in prices represents the difference in quality between the two. The assumption is that the market has adequate knowledge of the qualities and prices of each product and that the difference in price is regarded by them as a reasonable measure of the difference in quality. The second product is then substituted for the first using the technique of splicing price series, as illustrated below:

    Example: consider two harvesters for sale. Harvester A is for sale in period 0 and period 1. Harvester B is for sale in period 1 and period 2. The two harvesters are both for sale during period 1, in which case there is an overlap of the two products. The products are considered to be of different qualities.

    Price of HarvesterPeriod 0Period 1Period 2
    Harvester A$80,000$85,000 
    Harvester B $95,000$98,000
    Price relative for harvesters100.0100 x 85,000 / 80,000106.3 x 98,000 / 95,000
      106.3109.7

    The price movement reflected in the index from period 0 to period 1 is the movement in the price of Harvester A (6.3%). The price movement from period 1 to period 2 is based on Harvester B (3.2%), which will be priced in subsequent periods to replace Harvester A. The difference in price between Harvester A and Harvester B has been eliminated through the process of splicing the new price series to the old price series.

    An equally applicable interpretation of this process is to consider the comparison of prices between period 1 and period 2. In period 1, Harvester A is priced at $85,000. In period 2, Harvester B is priced at $98,000, and this is interpreted as:

    • a quality change of $10,000, from $85,000 to $95,000
    • a price change of $95,000 to $98,000.

    In some cases, even with overlapping sales, simple splicing of the price of the new specification to the existing price series is not a satisfactory way of eliminating changes in quality. This situation occurs, for example, when the price of a new model reflects not only the extent of modifications but also a degree of price change, upwards or downwards, for reasons quite distinct from these modifications. In these circumstances, a simple splicing of the old and new prices would eliminate the elements of pure price change as well as the elements of change in quality. In such cases, it is necessary to assess the degree of pure price change involved and to ensure that this is reflected in the price series after splicing.

    Non-overlapping sales

    Where two qualities are not sold in the marketplace at the same time, it is necessary to implement indirect methods of quantifying the change in quality. This circumstance arises frequently for durable products, such as motor vehicles, white goods, home entertainment products and so forth, where producers cease all production of the superseded model when a new model is introduced. In these cases, it is necessary to estimate the relative prices of the old and new models, had they been sold in the market at the same time. The estimated relative prices then give an indication of the measure of the relative qualities.

    In many circumstances the difference between the old and new products is a matter of size or dimensions. For example, an 80g jar of instant coffee is replaced with a 100g jar. In such cases the difference in price is readily determined by considering the per unit price; in the case of instant coffee, the change in price per gram would yield the quality adjusted price change¹. 

    Price of CoffeePeriod 0Period 1
    80g jar$4.20 
    100g jar $5.00
    Price per gram$0.0525$0.05
    Price relative for coffee                                           100.0 100 x $0.05 / $0.0525
      95.2

    This process is equivalent to considering the difference in size as a difference in quality, and then explicitly pricing this difference. In the case of the coffee jar, the process would be to determine the price of the extra 20g. This value would then indicate the quality change between the smaller and the larger jar. In practice, this value of the quality difference is used to quality adjust the previous period price, such that the products in both the current period and the previous period are of the same quality.

    Price of CoffeePeriod 0Period 1
    80g jar$4.20 
    100g jar $5.00
    Price per gram$0.0525$0.05
    Change in quality 20g
    Value of quality change in previous period prices20g x $0.0525/g = $1.05 
    Quality adjusted price (i.e., 100g jar of coffee)$4.20 + $1.05 =$5.25$5.00
    Price relative for coffee100100 x $5.00 / $5.25
      =95.2

    These data may be interpreted as:

    • a quality change of $1.05, from $4.20 to $5.25, representing the addition of an extra 20g of coffee; and
    • a price change of $-0.25, being the fall from $5.25 to $5.00.

    Component approach

    The method used to adjust for changes in the composition of a quality is to identify the quality difference and place a value on that difference. Frequently the composition of a particular product changes because of the use of different materials or the addition or deletion of particular features.

    An example would be a change in the wool/synthetic mix of a yarn. In such cases, the technique used to estimate the value to the user of the quality change involves ascertaining the additional cost (or saving) to the manufacturer and examining the prices of broadly comparable products (e.g. yarns containing various proportions of pure wool and synthetic fibres).

    Sometimes the modified product differs markedly from the previously priced product. An example of such changes occurs with the change in model for a particular make of motor vehicle. This type of quality change requires the collection of a considerable amount of information and, in some cases, subjective judgement is required to estimate a monetary value by which to adjust the price. The first step is to obtain a full picture of the differences between the old and new models. This is done by:

    • obtaining detailed information from the manufacturer or industry associations, such as design and engineering reports
    • examining published tests and other comments on the new model in trade publications, magazines, etc.
    • physically examining the new model and questioning producers about the nature of the changes.

    Having identified the precise differences between the models, the next step is to determine which of these differences represents changes in quality and to estimate the monetary value of each change. Some changes are relatively simple to quantify. Continuing the car example, changing the type of tyres on the new model when both types of tyres are sold separately in the market is readily assessable since the value of the quality change can be assessed as the difference in the selling prices of the tyres.

    Other changes require more detailed examination. If we consider motor vehicles again, a new model car may have leather covered seats while the old model has cloth covered seats, in which case the factors that would be considered are:

    • the unit cost to the manufacturer of the change
    • whether the leather covered seats have been previously available as an option and, if so, what was the price and did a significant number of buyers purchase the option at that time
    • the change in comfort and durability of the seats.

    Hedonics and rapid technological change²

    When faced with measuring prices for products which undergo rapid quality change, international best practice is to develop hedonic price indexes when suitable source data are available. This is the approach being advocated by international agencies such as the Organisation for Economic Co-operation and Development³, the International Labour Organization and the International Monetary Fund.

    A hedonic price index is any price index that utilises, in some manner, a hedonic function. In broad terms, a hedonic function identifies the relationship between the prices of different varieties of a product, such as differing models of personal computers, and the characteristics within them. By comparing prices and features of various computers, a hedonic regression model assigns values to each of the particular features that are identified as price determining (for example, processor speed, memory, disk capacity etc.).

    Personal computers are an area of rapid technological change. Products available in the marketplace change frequently as new features are added and existing features improve. For example, the rapid change in hard disk size, random access memory, and clock speed of desktop personal computers is well documented. A further issue is that older models quickly become redundant. The net result of these changes is that over any two periods there are both new products and discontinued products, with the result that comparing like with like becomes difficult. This is of particular concern when it is observed that improved features on later models do not always result in a price rise, or a commensurate price rise that would be observed if the components were bought separately (again, a bigger hard disk drive is an example). The quality adjustment problem is applicable to all price indexes, not just those for personal computers. However, traditional approaches to solving this problem (for example, matched model approaches, explicit quality adjustments, or component level pricing, amongst others) are inadequate for these sorts of products.

    The Producer Price Indexes use a form of hedonic index known as the 'consecutive two period chained time dummy double imputation hedonic price index' for use in price indexes for personal computers. This process sees a matched model price index applied for personal computers sold between consecutive periods, combined with a consecutive-period time dummy price index (this is produced by using regression techniques) to measure price changes for both discontinued and newly introduced products.

    The double imputation method can best be thought of as a traditional matched model index with an explicit adjustment applied because of both the departure of superseded models and the introduction of new models. A key deficiency of the basic matched model approach is that it makes no provision for systematically including the effects of price and quality changes in models available in the marketplace, and determines price change by only considering those models which appear in the market in both periods of interest. In other words, any improvement in quality associated with the introduction of a new model will not be measured if only matched models are priced.

    The double imputation price index counters this deficiency by implicitly imputing price movements for both superseded models and newly introduced models. This is where the term 'double imputation' arises. A hedonic regression model is run on the dataset each period and from this, a price factor is determined for each characteristic of the computer. Whilst this gives the ability to calculate the price for each specification, what is actually used in the imputation, is the time dummy variable. The time dummy variable is representative of the price change between the two periods taking into account the different characteristics of the computer. This is combined with the matched model index to create the double imputation index which will reflect the movement of the whole sample. The index is then considered representative of all transactions, since recently superseded models and new models are included in the determination of price change, in addition to products common to both periods.

    Further, the implicit imputation process at the core of this technique uses a hedonic function to adjust for changes in the characteristics of both the new and superseded models; that is, the prices imputed are adjusted for quality change, and hence the resulting index measures pure price change.

    The process utilises price data from Australian vendors of personal computers, and so is not only representative of the Australian marketplace but also avoids issues with both exchange rate fluctuations and arbitrarily lagging prices to take account of shipping times etc. The double imputation index uses a hedonic function based on characteristics of personal computers sold in the Australian marketplace, using prices in Australian dollars, and so furthermore does not rely on the restrictive assumptions underlying a universal hedonic function.

    Any movements in the double imputation index can be decomposed into the movement due to changes in prices of the matched sample, and the movement due to changes in other products in the marketplace. Movements in the index can be explained in terms of changes in list prices of existing products and changes in quality of new products, and so the resulting measures are easily explainable to users.

    Not directly comparable

    Despite the efforts to quantify explicitly differences in quality, circumstances occasionally arise where insufficient information exists to value the differences between two models of a product. In such cases it is still necessary to make a quality adjustment to allow comparison of prices. In the absence of any other information, the strategy employed in the Producer and International Trade Price Indexes is to consider the problem in two parts:

    1. If the old model had existed in the current period, how much would the price have changed between the current and previous period?
    2. What would the price have been in the current period?

    If no other information is available, the quarterly movement in the price of the old model needs to be estimated from the price movements of similar products. In this manner the price movement problem is directly comparable to the imputation and temporarily missing price observations problem described in the Producer and International Trade Price Indexes Calculation in practice section.

    Once the price movement has been determined, an estimate of the current period price for the old model can be made by working forwards from the observed previous period price. The new model is then introduced in the subsequent period (with a back price), and any difference at that time between the estimated price for the old model and the (observed) previous period price for the new model is due to the difference in qualities between the two models.

    This approach is only used in circumstances where other efforts at quality adjustment have been exhausted, since excessive use would introduce bias into the price indexes. Such biases arise because of the assumptions underlying the application of this technique.

    1. Prices for new models move the same as prices for other models - the use of the not directly comparable technique has an implicit assumption that the new model has the same price movement as other models. It is known across some industries that prices are increased when new models are introduced (as a means of increasing revenues and profits), in which case use of this mechanism would result in a downward bias for these types of products.
    2. Prices change for reasons other than the introduction of new models - a more severe consequence of the prices move the same assumption occurs for those products where the only price movement occurs when models are changed. In this case, prices for continuing models remain static from period to period. The introduction of a new model would always result in an imputed (estimated) price change of zero - meaning that the index would never change. This may also be interpreted as all differences in observed price being solely attributable to quality change.

    Introducing new products

    The incorporation of new products into an index, results in high quality indexes because it ensures they have a representative sample. New products exhibit different pricing behaviours to established products. Excluding them will result in biasing of the indexes.

    The production or importation of a new product causes particular difficulties in compiling indexes and these difficulties arise because:

    • new products are difficult to identify when using a fixed basket; in particular, difficulties arise when differentiating new products from improvements to existing products
    • measuring price changes for new products has its own range of issues
    • incorporating a new product into a fixed basket index requires index restructuring, measurement of value data for the new product and reweighting of the existing index structure.

    Identifying new products

    The key question in identifying new products is differentiating new products from existing products whose quality has changed. A practical definition of a new product is that the new product cannot be effectively linked to an existing product as a continuation of an existing resource base and service flow. For example, the VCR was a completely new product when it was introduced in the 1970s because nothing like it had existed before. On the other hand, the DVD recorder replaced the VCR when it was introduced.

    Identifying new products requires regular assessment of the marketplace, involving ongoing liaison with producers, regulatory authorities, and industry associations. The ABS approach this problem using several different methods.

    For the International Trade Price Indexes, new products are identified through the analysis of data from the Australian Border Force, and International Merchandise Trade Statistics. These data are particularly useful since they not only highlight the emergence of new products but also the value of sales and purchases, indicating the importance of any new product.

    The Producer Price Indexes use a variety of different instruments to detect the emergence of new products. First, questions regarding new products are asked each period in the Survey of Producer Prices. Second, regular contact is made with providers outside the quarterly cycle to assess specifically potential changes in production. Finally, a program of personal visits is made to providers and industry associations.
     

    Measuring price change for new products

    After a new product is identified, its price for two consecutive periods needs to be determined before it is included in the price index. This requirement ensures that a quarterly price movement can be associated with the new product. Such a requirement means that back prices are sometimes used, where the price in a previous period is supplied in a later period. In all circumstances, it is necessary for the product to have existed in the marketplace sufficiently long enough for a price movement to be determined. Of further concern is that an individual new product will almost certainly represent other such products sold in the marketplace, in which case it is necessary that any such initial price movement is representative of the entire market (for the new product).

    Incorporating the new product into the basket

    A new product, by its very nature, does not belong to the fixed basket of a price index and must be introduced at some point after its arrival in the marketplace. As described above, the bias associated with new products is exacerbated through delays in introducing it into the price index. Yet a new product can only be introduced when both sufficient value data for the product exists and when the price index is reviewed.

    Value data (either revenue or expenditure depending upon the nature of the price index) are essential for incorporating any product into a price index. Introducing a new product will also have an impact on the revenue (or expenditure) of other products in the marketplace. Consequently, value data are required for not only the new product but also for other products in the price basket. The introduction of a new product results in a value aggregate (and therefore a weight) being attached to the new product, and a change in the value aggregates of other products in the basket.

    Footnotes

     ¹ In such cases the change in size is assumed to be the only change, and that the resulting new product has the same end use as its predecessor. This approach cannot be adopted when the change in size suggests a different end use (eg, 80g jar of coffee with 5kg container of coffee). In such circumstances it is necessary to adopt other quality adjustment mechanisms.

    ² For a more detailed description of hedonic price indexes and the ABS methodology, see the ABS Information Paper The Introduction of Hedonic price Indexes for Personal Computers, 2005 (cat. no. 6458.0). 

    ³ For example, Triplett, J, 2004, Handbook on hedonic price indexes and quality adjustments in price indexes: special application to information technology products. OECD STI working paper 2004/9.

    Index review methodology

    As the economy evolves and industries emerge and change, the ABS regularly reviews the scope and composition of its Producer and International Trade Price Indexes. This process is known as an ‘index review’ and can result in changes being required to existing price indexes, and to implement these changes, three steps must be undertaken to effectively update the series without compromising the quality of the price index:

    • A link period must be chosen
    • Value data must be price updated to the link period
    • The newly weighted index chained onto the existing price index.

    This process can apply to changes to an exist index series, or when a new elementary aggregate (or any other component) is introduced into a price index structure.

    Identifying the Link Period

    The link period is the designated time period where the index is calculated on both an old and new weighting basis. The link period is based on availability and timing of data, internal resource constraints, economic behaviour and should not coincide with changes to tax legislation or other significant regulatory amendments.

    It is generally up to the index manager to identify an appropriate link period to implement a change to the index series, however, in practice the June quarter is the preferred period as it allows direct comparison of complete financial years without having to account for the link. 

    Price updating value data

    Weights are price updated to account for price changes between the weight reference period and the link period. Weighting data usually comes from an annual data source, and in some cases can span more than one year. The link period, however, is always chosen to be a single quarter, and is always a period subsequent to the weight reference period. Although only observed in aggregate, the value data can be considered as being composed of the product of prices and quantities from the weight reference period. For inclusion in the index, these data will be expressed in terms of quantities from the weight reference period and prices from the link period.

    Price updating value data is achieved by multiplying the weighting data by the proportional price change between the weight period and the link period. This updating occurs at the elementary aggregate level, with the resulting upper level value aggregates determined by aggregating the price updated components along the index structure.

    The proportional price change between the weight period and the link period is determined by the ratio of the price indexes for the two periods; here the price indexes are on the existing index structure. In the usual case where the weighting reference period is longer than a quarter, the price index for the weight period is determined as the average of the quarterly price indexes that the weighting period spans. The ratio is the link period index divided by the averaged weight period index.

    The resulting link period value aggregate is then expressed in terms of prices from the link period and quantities from the weight reference period.

    Chain linking through a link period

    Chain-linking is the process of joining together two indices that overlap in one period by rescaling one of them to make its value equal to that of the other in the same period therefore combining them into a single time series. This is achieved by multiplying the index value by the linking factor.

    When new weights are introduced, the price reference period for the new index can be the last period of the old index, the old and the new indices being linked together at this point. The old and the new indices make a chained index.

     Chain linking can best be illustrated by means of an example. In this example we will consider a price index at period \(k\), with the index constructed from weights introduced in the reference period \(0\). Using the terminology from Chapter 10, we would express the price index at period \(k\) as

     \(I^k=\frac{VA^k_{OLD}}{VA^0_{OLD}}\times I^0\)

    If we choose period \(k\) as the link period, any future period price indexes will make comparisons back to the link period, and be scaled by the link period index \(I^k\). Any such comparisons will use the same price index \(I^k\) but use a value aggregate calculated on the new weighting basis. If we consider \(t\), some period after \(k\), a price index measuring the average price change from period \(0\) to period \(t\) is given by

    \(I^t=\frac{VA^t_{NEW}}{VA^k_{NEW}}\times I^k\)

    Example of the chain linking process

    The use of fixed weights (as in a Lowe formula) over a long period of time is not considered a sound practice.

    For example, weights in a producer price index have to be changed to reflect changing production patterns. Production patterns change in response to longer term price movements, changes in preferences, and the introduction or displacement of products.

    The Producer and International Trade Price Indexes use a Lowe index. There are two options for updating weights. Option one, known as the direct method, involves holding the weights constant over as long a period as seems reasonable, starting a new index each time, the weights are changed. This means that a longer-term series is not available. Option two is to update the weights more frequently and chain link the series together to form a long-term series. The latter is the method used for ABS price indexes.

    The behaviour under chain linking of the Lowe index formula is explored in Table 3.8 below.

     Table 3.8 A closer look at linking

    ItemPeriod 0Period 1Period 2Period 3Period 4
    Price ($)
    Electricity1012151015
    Gas1213141210
    Water1517181512
    Quantity
    Electricity2017122010
    Gas1515161520
    Water101281015
    Index number
    Index Formula
     Lowe     
     period 0 to 1100.0114.2   
     period 1 to 2 100.0112.9  
     period 2 to 3  100.078.8 
     period 3 to 4   100.0107.5
     chain100.0114.2128.9101.6109.2
     direct100.0114.2130.2100.0107.5

    In period 3, prices and quantities are returned to their index reference period values and in period 4 the index reference period prices and quantities are shuffled between items. The period 3 situation is sometimes described as time reversal and the period 4 situation as price bouncing.

    The index number under direct estimation returns to 100.0 when prices and quantities of each item return to their index reference period levels; however, the chained index numbers do not.

    This situation poses a quandary for prices statisticians when using a fixed weighted index. There are obvious attractions in frequent chaining; however, chaining in a fixed weighted index may lead to biased estimates. This can occur if there is seasonality or cycles in the price, and chaining coincides with the top or bottom of each cycle. For this reason, it is generally accepted that indexes should not be chained at intervals less than annual.

    Re-referencing methodology

    The Australian Bureau of Statistics changes the index reference period (a process known as re-referencing) for its suite of price indexes from time to time, but not frequently. This is because frequently changing the index reference period is inconvenient for users, particularly those who use price indexes for contract escalation, as it rebases the index reference period back to 100.0. Additionally, the process of re-referencing can result in the loss of precision for historic data, especially for time series with a significant historical timeseries.

    Re-referencing in practice

    The conversion of an index series from one index reference period to another involves calculating a conversion factor using the ratio between the two series of index numbers. The derived conversion factor is applied to the historical series to create a new historical series on the new reference period.

    For example:

    In this example, an update to the index reference period of an index series is required to be made from an index reference period of 1998-99 = 100.0 to 2011-12 = 100.0 (see Table 3.9 below).

    The average value of the price index series from the index reference period of 1998-99 is (150.2 + 150.7 + 151.1 + 152.2)/4 = 151.1. (rounded to one decimal place).

    A conversion factor is then derived by diving the rounded average value by 100 (100.0/151.1) to produce the value of 0.6620.

    The March quarter 2011 index number for the new index reference period of 2011-12 = 100.0 would be the value of the current March quarter 2011 index value (147.0) multiplied by the derived conversion factor (0.6620), which would be 97.3 (147.0×0.6620).

    Table 3.9 Converting index reference periods 

      Index reference period(a)
    Period1998-99=100.02011-12=100.0
    Mar qtr 201114797
    Jun qtr 201115099
    Sep qtr 201115099
    Dec qtr 2011151100
    Mar qtr 2012151100
    Jun qtr 2012152101
    Financial year 2011-12151100
    Sep qtr 2012153101
    Dec qtr 2012153102
    Mar qtr 2013153102
    Jun qtr 2013154102
    Sep qtr 2013156103
    Dec qtr 2013157104

    (a) Conversion factor: 1998-99 index reference period to 2011-12 index reference period = 100.0/151.1 = 0.6620. 

    A similar process would be used to reconvert the data back from the 2011-12 index reference period to the 1998-99 index reference period.

    For example:

    If the December quarter value for 2012 of a price index was 103.6 which, when multiplied by the conversion factor of 1.511 (151.1/100.0), would give an index number of 156.5 on the index reference period of 1998-99 = 100.0.

    It should be noted that a different conversion factor will apply for each index. There is no universal conversion factor for all Producer and International Trade Price Indexes.

    Please note that re-referencing should not be confused with reweighting. Re-referencing does not change the relative movements between periods. However, reweighting involves introducing new weights and recalculating the aggregate index for each period which will affect the relative movements between periods.

    Implications of re-referencing on the timeseries

    As stated above, the process of re-referencing can have an impact on the precision of long-term historical time-series. This issue arises as a result of the ABS rounding and storing published price indexes to one decimal place.

    Published percentage changes to index numbers are calculated from the rounded index numbers. A consequence of re-referencing price indexes can be that period-to-period percentage changes may differ to those previously published due to rounding of the re-referenced values. These differences do not constitute a revision.

    As re-referencing is conducted to account for substitution in the marketplace, the evolution of pricing methods and the emergence of new products. Re-referencing is not performed frequently as changing the index reference period is problematic for users, particularly those who use the Producer and International Trade Price for contract escalation.

    The ABS last re-referenced the Producer and International Trade Price Indexes in the September quarter 2012 with the index reference period of the 2011-12 Financial Year = 100.0 

    Impact of exchange rates on the International Trade price indexes

    The Import Price Index and Export Price Index employ the use of exchange rates where the contractual currencies of transactions are recorded in currencies other than Australian dollars. While a proportion of Australia’s international trade is conducted in Australian dollars, those that are traded in foreign currencies require conversion to Australian dollars. Hence changes in the relative value of the Australian dollar against overseas currencies (in particular, the major trading currencies such as the United States dollar, Japanese yen, Pound sterling and Euro) has a direct impact on the price of  products purchased or sold in foreign currencies. That is, when the Australian dollar appreciates, it buys more foreign currency, and the price of the product in Australian dollars falls. Conversely, when the Australian Dollar depreciates, it buys less foreign currency and price of the product in Australian dollars rises.

    Example:

    Consider a transaction undertaken in US dollars.  Assume that the transaction is $200 USD in both September and December.

    If the exchange rate in September is 0.75 (that is, 1 Australian dollar buys 0.75 US dollars, or 75 US cents), the $200 USD transaction equates to:

    AUD price = USD price / (USD per AUD exchange rate)

                     = $200 USD / (0.75 USD per 1 AUD)

                     = $266.67 AUD

    If the exchange rate in December is 0.80 (that is, 1 Australian dollar buys 0.80 US dollars, or 80 US cents), then we say that the "dollar has appreciated", and the $200 USD transaction equates to:

    AUD price = USD price / (USD per AUD exchange rate)

                     = $200 USD / (0.80 USD per 1 AUD)

                     = $250.00 AUD

    The Australian dollar price has fallen from $266.67 to $250, or a fall of 6.25%

    Chapter 4 General Compilation Methodology

    This section of the publication provides users with a summary of the current compilation methods and processes of the Producer and International Trade Price Indexes and detailed information for the current price indexes producer by the ABS for the Producer Price Indexes, Australia and International Trade Price Indexes, Australia releases.

    Calculating the PPIs and ITPIs in Practice

    This section of the publication explains the practical application of the methodology explained above in the technical methodology section of this release for the quarterly compilation of the Producer and International Trade Price Indexes.

    Defining elementary aggregates

    The first stage of the compilation process is to estimate the elementary aggregate values from a sample of prices. The elementary aggregate values take the form of a price index, and they are then averaged to obtain higher level indexes using the relative values of the value aggregates for the elementary aggregates as weights.

    Elementary aggregates are constructed by grouping homogeneous individual products and transactions.

    Groups may be formed from products in various regions of the country or from the country as a whole.

    Likewise, elementary aggregates may be formed from different types of providers or from various sub-groups of products. The key points in constructing an elementary aggregate are: 

    • Elementary aggregates consist of groups of products that are as similar as possible in terms of price determining characteristics (i.e. the group of products is homogeneous).
    • They consist of products that may be expected to have similar price movements. The objective should be to try to minimise the dispersion of price movements within the aggregate.

    Each elementary aggregate, whether relating to the whole country, a region, or a group of providers, will typically contain a large number of individual products. In practise, only a small number of products can be selected for pricing. When selecting the products from period to period, the following considerations are taken into account:

    • The transactions selected are ones whose price movements are believed to be representative of all the products represented by the elementary aggregate.
    • The number of transactions within each elementary aggregate for which prices are collected should be large enough for the estimated price index to be statistically reliable and representative of the product sampled. The minimum number required will vary between elementary aggregates depending on the nature of the products and their price behaviour.
    • The objective is to try to track the price of the same product over time for as long as possible, or as long as the product continues to be representative. Therefore, the products selected are ones that are expected to remain on the market for some time so that like can be compared with like.

    The aggregation structure

    The development of the aggregation structures for Producer and International Trade Price Indexes follow the technical methodology for weighting explored above.

    Using different classifications of products and industries, the Producer and International Trade Price Indexes can be divided into broad divisions, sub-divisions, and groups, and then further refined into smaller sub-groups/classes depending on the classification structure adopted for the indexes (see below for further information on the classifications used for each Producer and Trade Price Index). At the bottom of the standard classification structure, further disaggregation is made to reflect different products and different price behaviours.

    Each component in the price index, from the root level (or top level or all products) of the aggregation structure down to each individual elementary aggregate, is associated with two distinct characteristics that allow future compilation of aggregate price index measures, as defined in the Index Review methodology section above. These defining characteristics are:

    • The link period value aggregate: The value aggregate defined at the period when the index weighting structures commence; this measure effectively determines the underlying quantity weights of the price index
    • The link period P-index: The price index number at the period when the index weighting structures commence; it measures the price change for the component that occurred between the link period and the price index reference period; in the case where the link period and the index reference period are the same, the link period P-index takes a value of 100.0.

    In addition to these characteristics, the elementary aggregates have one additional feature in that they are the only components within the index structure to have price samples. From these price samples, it is possible to directly construct price indexes. A price index for an elementary aggregate should measure price change and correctly account for changes in quality and both new and disappearing products.

    The construct of an elementary aggregate index is also known as an elementary aggregate C-index.

    Beginning with these two defining characteristics and the aggregation structure, price indexes are created by working upwards from the elementary aggregate C-indexes. All indexes above the elementary aggregate level are higher level indexes that can be calculated from the elementary price indexes using the elementary value aggregates as weights. The aggregation structure is consistent so that the weight (link period value aggregate) at each level above the elementary aggregate is always equal to the sum of its components.

    The price index at each higher level of aggregation can be calculated on the bases of the weights and price indexes for its components, i.e. the lower level or elementary indexes. The individual elementary price indexes are not necessarily sufficiently reliable to be published individually, but they remain the basic building blocks of all higher-level indexes.

    The compilation of elementary price indexes

    Within the Australian PPIs and ITPIs, the elementary aggregate C-indexes are calculated using either the Laspeyres price index formula, the Lowe price index formula, or the Jevons (geometric mean) price index formula.

    The Lowe price index is common across most index calculations due the price reference period and the weight reference period being at different times. The Laspeyres price index is illustrated by means of a numerical example in Table 4.1.

    In the example, we have assumed that the following conditions apply:

    • prices are collected for four representative products within an elementary aggregate
    • the quality of each product remains unchanged over time so that the period-to-period changes compare like with like
    • a set of weights is available for use in the Laspeyres index formula
    • prices are collected for all four products in every period covered so that there is a complete set of prices
    • there are no disappearing products, no missing prices and no replacement products.

    This example has quite strong assumptions, because many of the problems encountered in practise are attributable to breaks in the continuity of the price series for the individual transactions for one reason or another¹.

    The calculation of the elementary aggregate C- index begins through calculation of a weight for each price observation. For elementary aggregates that use the Jevons index formula, the weights are equal.

    The majority of elementary aggregates in the Producer and International Trade Price Indexes use the Laspeyres index formula, which is applied through the price relative form. In this form, price relatives are combined using weights that represent the value share in the reference period. These weights represent not only the value of the particular transactions included for pricing in the elementary aggregates each period but also the other transactions which these observations represent. The reference period value share is determined once for each observation and is only modified if the products in the elementary aggregate are changed; in which case the elementary aggregate undergoes sample maintenance, which is described in more detail in the Maintaining relevance section below.

    Table 4.1 Example of elementary aggregate price index using the Laspeyres price relative approach
     Reference periodPeriod 1Period 2
     Reference period value sharePrice ($)Price RelativeWeight x relativePrice ($)Price RelativeWeight x relativePrice ($)Price RelativeWeight x relative
    Product A3051.00030.00061.20036.00071.40042.000
    Product B2071.00020.00071.00020.00060.85717.143
    Product C1021.00010.00031.50015.00042.00020.000
    Product D4051.00040.00051.00040.00051.00040.000
    Laspeyres price index   100.0  111.0  119.1
    Percentage change from previous period      11.0%  7.3%
     

    This example shows a price index of 111.0 in period 1, and 119.1 in period 2. The prices in the elementary aggregate have moved 11.0% in the first period, 7.3% in the second period and 19.1% since the reference period.

    Footnotes

    ¹ Departures from these assumptions are discussed separately: introduction of new providers is discussed in the Price index theory section , the treatment of new products is described in the  Quality change and new products section, imputation for missing prices is discussed in this section and changes to the types of products in the marketplace are discussed in the Maintaining relevance section.

    Compiling the Primary Price indexes

    Once a price movement for the elementary aggregate is determined, the resulting C-index price movement is used to price update the value aggregate associated with the elementary aggregate. The resulting measure is known as the price updated value aggregate (or current period value aggregate).

    For a given elementary aggregate:

    \(VA^t_{EA}=\frac{I^t_C}{I^{t-1}_C}\times VA^{t-1}_{EA}\)

    where \(VA^t_{EA}\) is the current period value aggregate for the elementary aggregate in period \(t\)\(VA{_{EA}}^{t-1}\) is the previous period value aggregate, and \(I^t_C\) and \(I_C^{t-1}\)are respectively the current and previous period C-indexes for the elementary aggregate.

    The price updated value aggregate is then used to determine the current period P-index for the elementary aggregate.

    \(I^t_{P,EA}=\frac{VA^t_{EA}}{VA^{LINK}_{EA}}\times I^{LINK}_{P,EA}\)

    where \(I^t{_p}\) is the current period P-index for the elementary aggregate in period \(t\)\(VA_{EA}{^{LINK}}\)is the link period value aggregate for the elementary aggregate and \(I^{LINK}{_{P,EA}}\) is the link period P-index for the elementary aggregate.

    Once the current period value aggregates for all elementary aggregates are determined, the current period value aggregates for all higher level components of the index structure are calculated by summing the price updated value aggregates of their components.

    Current period price indexes for any component in the aggregation structure are then calculated by price updating the link period P-index for the component. That is, for any component, the current period P-index is given by:

    \(I^t_p=\frac{VA^t}{VA^{LINK}}\times I^{LINK}_{P}\)

    where \(I^t{_P}\) is the current period P-index in period \(t\)\(VA^t\) is the current period value aggregate for the component, \(VA^{LINK}\) is the link period value aggregate for the component and \(I_P{^{LINK}}\) is the link period P-index for the component of the index (or aggregation) structure.

    Calculating points contribution and points change

    Points contributions are also calculated using the value aggregates. In any period, the points contribution of a component to the top level is calculated by multiplying the root index number for the period by the value aggregate for the component in that period and dividing by the root value aggregate for that period. This can be stated algebraically as:

    \(PC^t_i=I^t{_{P,ROOT}} \times \frac{VA^t_i}{VA^t_{ROOT}}\)

    where \(PC^t{_i}\) is the points contribution for component \(i\) in period \(t\)\(I^t{_{P,ROOT}}\) is the P-index for the root in period \(t,VA^t{_i}\) is the value aggregate for component \(i\) in period \(t\) and \(VA^t{_{ROOT}}\) is the value aggregate for the root of the index in period \(t.\)

    Changes in points contribution for a component of a price index give an assessment of the component’s contribution to net price change. However, such a comparison is limited to periods between linking of price indexes. Comparisons of a component’s contribution to the index that cross a link period are comparing contributions on different weighting bases and therefore do not measure the contribution to net price change; any attempt at such comparison will confound change of weight with change of price.

    Calculation of upper level price indexes is illustrated in Table 4.2. This table shows an input price index where products are classified by source (domestic and imported) and then by type of product. In Part 1 the P-index for period 1 is calculated. Part 2 shows the calculation of the percentage movement in the elementary aggregate C-index from period 1 to period 2. Part 3 shows how the current period value aggregates for period 2 are then derived and used to calculate the P-index for period 2.

    Table 4.2 Example of aggregation of a price index
     Value aggregatesP-IndexElementary Aggregate C-Index Price Updated Value aggregate(Period 2)P-Index(period 2)
     Link PeriodPeriod 1Link PeriodPeriod 1Period 1Period 2% movement
    Total inputs105,479133,610105.6133.7   152625152.7
    Imports41,19844,909110.0119.9   47989128.1
    Textile, clothing, footwear5,6825,750109.3110.6110.6109.7-0.8%5704109.7
    Wood and paper products4,6544,753100.3102.4102.4106.33.8%4934106.3
    Chemicals, plastic, rubber11,12710,74297.193.793.796.22.7%1102996.2
    Fabricated products16,09917,885107.8119.7119.7120.70.8%18035120.7
    Agricultural products562548119.9116.9116.9121.84.2%571121.8
    Mining products3,0745,230103.2175.6175.6259.147.6%7717259.1
    Domestic64,28188,701104.7144.5   104635170.5
    Agricultural products28,03638,530107.9148.3148.3148.1-0.1%38478148.1
    Electricity and gas11,16912,289110.0121.0121.0125.63.8%12756125.6
    Forestry and logging1,4721,738113.0133.4133.4142.46.7%1856142.4
    Mining products23,60436,144102.6157.0157.0223.942.6%51546224.0

    Compiling price indexes

    Compiling primary price indexes

    Generally, there are three kinds of product price indexes for a given industry. Firstly, primary indexes that show changes in prices received by producers in the industry for products made primarily, but not necessarily exclusively, by that industry. The industry within which a producer is classified is determined by those products that account for the largest share of the company's total value of shipments. Secondly, many industries have secondary product indexes that show changes in prices received by producers in the industry for products made chiefly in some other industry. Finally, some industries may have miscellaneous product indexes to show price changes in other sources of revenue received by producers within the industry.

    Compiling secondary price indexes

    A key philosophy of price index design for the Producer and International Trade Price Indexes is to re-use components to maximise the utility of collected data. One mechanism that helps achieve this aim is through the construction of secondary indexes. The preceding sections have described how elementary aggregate price indexes can be combined to produce higher level indexes. The particular combination of elementary aggregates is determined by the underlying classification of the price index.

    However, a given elementary aggregate may be classified in multiple ways. Reclassifying elementary aggregates according to a different aggregation structure results in a secondary index. The relationship between the original primary source index and the secondary index is marked by two important features. First, the elementary aggregates for the secondary index are the same as those in the primary source index, having the same P-indexes and value aggregate data.

    Second, the primary source index and the secondary index are identical at the root or top level of the index. The indexes only differ at the intermediate levels (between the root and the elementary aggregates), since a secondary index is defined through the different aggregation structure.

    Frequent use of secondary indexes occurs within the International Trade Price Indexes, with classification by both Standard International Trade Classification and Broad Economic Categories.

    An example of a secondary index is provided in Table 4.3. This example uses a reclassification of the elementary aggregates presented in Table 4.2, with emphasis on type of product rather than the domestic or imported split.

    Table 4.3 Example of a secondary price index
     Value aggregates P-Index 
     Link PeriodPeriod 2Link PeriodPeriod 2
    Materials used105,479152,625105.6152.7
    Agricultural products28,59739,048108.1147.6
    Domestic28,03638,478107.9148.1
    Imported562571119.9121.8
    Chemicals, plastic, rubber11,12711,02997.196.2
    Imported11,12711,02997.196.2
    Electricity and gas11,16912,756110.0125.6
    Domestic11,16912,756110.0125.6
    Fabricated products16,09918,035107.8120.7
    Imported16,09918,035107.8120.7
    Forestry and logging1,4721,856113.0142.4
    Domestic1,4721,856113.0142.4
    Mining Products26,67959,263102.6228.0
    Domestic23,60451,546102.6224.0
    Imported3,0747,717103.2259.1
    Textile, clothing, footwear5,6825,704109.3109.7
    Imported5,6825,704109.3109.7
    Wood and paper products4,6544,934100.3106.3
    Imported4,6544,934100.3106.3

    The key feature of secondary indexes is that they rearrange the existing basic building blocks of the price index along a different compilation structure, and in doing so retain both the price movements and underlying value aggregates of the elementary aggregates.

    Compiling Tertiary price indexes

    It is also possible to construct tertiary indexes, where price movements are retained but an entirely new weighting pattern is applied. In this case the resulting tertiary index has consistent price movements at the elementary aggregate level, but results in a different price movement at the top or root of the index. This device is a powerful analytical tool that allows further re-use of price samples.

    Price Indexes and the Value Aggregate

    A price index is only meaningful in relation to the basket to which it refers. The value aggregate is a measure that expresses the reference period quantities in terms of current period prices. For an input price index, a value aggregate is a measure of expenditure, and for an output price index it is a measure of revenue. A value aggregate, with prices from period t and quantities from period 0 is defined as:

    \(V^{0,t} = {\displaystyle\sum_{i=1}^{N} P^t_iq^0i}\)

    The value aggregate includes the specification of a group of included products (which items to include), the economic agents engaging in transactions involving those products (which transactions to include), as well as the valuation and time of recording principles motivating the behaviour of the economic agents undertaking the transactions (determination of prices). The included elementary items, their valuation (the \(p^t_i\)), the eligibility of the transactions and the item weights (the \(p^0_i\)) are all included in the definition of the value aggregate.

    General weighting information of the Producer and International Trade Price Indexes

    For detailed information about the current weights for the Producer Price Indexes, please refer to the following release,  Producer Price Indexes Weighting Patterns, 2015.

    For detailed information about the current weights for the International Trade Price Indexes, please refer to the September quarter release of International Trade Price Indexes, which is re-weighted and update annually.

    Summary of the Current Suite of Producer and International Trade Price Indexes

    Details of the key Australian Producer and International Trade Price Indexes published by the ABS are outlined by industry below.

    For each price index group, information relating to the scope, classification, weights, and practical difficulties and issues for each index.

    Further information on historical development and changes for each index can be found in Chapter 5.

    Table 4.4 Final demand
    Type of indexOutput price indexes (transaction flow). Note: a more detailed description of the Final PPIs can be found in Chapter 5 Historical background.
    PurposeThe Final Demand price index is a broad economy-wide supply-side price index that is derived from the former Stage of Product Framework of the Producer Price Indexes. It provides a headline summary analytical series for the Producer Price Indexes.
    Major usesA general indicator of price change across the Australian economy at the final stage of demand.
    Pricing basisbasic prices
    Classification system

    Products are classified according to their industry of origin (or competing industry of origin for imports) according to Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006

    Imported products are classified to their equivalent Australian industry of origin
    Weight reference period2018-19
    Link periodDecember quarter 2021
    Index reference period2011-12=100.0

     

    Table 4.5 Input to the Coal mining industry
    Type of indexInput price index
    PurposeThis price index measures changes in the prices paid for input to the coal mining industry.
    Major usesThe major use of this price index is for contract adjustment. 
    Pricing basisPurchasers’ 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 systemThe Input to the Coal mining industry index is classified in accordance with the Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006.
    Weight reference period2011-12
    Link periodJune quarter 2015
    Index reference period2011-12 = 100.0

     

    Table 4.6 Output of the Manufacturing industries
    Type of indexOutput price index (gross division)
    PurposeMeasures changes in the prices in output of the manufacturing industry as a whole, and by the fifteen subdivisions within the manufacturing division.
    Major usesVolume measures in the Australian National Accounts; general economic analysis; contract adjustment. The components of these indexes are also inputs to the Final Demand indexes.
    Pricing basisBasic 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 systemProducts are classified according to the Input-Output Product Classification (IOPC). Published indexes are classified according to Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006
    Composition and weightingIndexes 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 period2018-19
    Link periodDecember quarter 2021
    Index reference period2011-12 = 100.0
    Table 4.7 Input to the Manufacturing industries
    Type of indexInput price index
    PurposeMeasures changes in the prices of goods and services used by the manufacturing industry as a whole, and by the fifteen Australian and New Zealand Standard Industrial Classification (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 usesVolume measures in the Australian National Accounts; general economic analysis; contract adjustment.
    Pricing basisManufacturers' 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 systemProducts 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 weightingIndexes 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 period2018-19
    Link periodDecember quarter 2021
    Index reference period2011-12 = 100.0

     

    Table 4.8 Output of the Construction industries
    Type of indexOutput 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 usesVolume measures in the Australian National Accounts, general economic analysis; contract adjustment. The components of these indexes are also inputs to the Final Demand indexes.
    Pricing basisBasic 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 systemThe Output of the Construction Industries indexes are classified in accordance with Australian and New Zealand Standard Industrial Classification (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 period2007-08 for the national level and 2010-11 for the state and territory level.
    Link periodJune 2012
    Index reference period2011-12 = 100.0
    Table 4.9 Input to the House construction industry
    Type of indexInput price index
    PurposeMeasures changes in the prices of selected inputs used in the construction of detached houses in each of the six state capital cities.
    Major usesVolume measures in the Australian National Accounts, general economic analysis; contract adjustment.
    Pricing basisPurchasers’ 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 systemThe Input to the House Construction industry index is classified in accordance with Australian and New Zealand Standard Industrial Classification (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 period2010-11 for input details, 2012-13 for state expenditure pattern.
    Link periodSeptember quarter 2013
    Index reference period2011-12=100.0

     

    Table 4.10 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
    • Education and training services industries
    • Health care and social assistance industries
    • Other services industries
    Type of indexOutput price index (gross division)
    PurposeMeasure changes in the prices of services classified to selected divisions of Australian and New Zealand Standard Industrial Classification (ANZSIC) 2006. Note that some ANZSIC 2006 industries do not yet have established indexes, and thus are not represented within these tables.
    Major usesVolume measures in the Australian National Accounts; general economic analysis; contract adjustment. The components of these indexes are also inputs to the Final Demand index.
    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 individual business provider is determined by way of industry consultation.

    Classification systemServices 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 weightingANZSIC 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, 2018-19 Final (cat. no. 5209.0.55.001).
    Weight reference period2018-19
    Link periodDecember quarter 2021
    Index reference period2011-12=100.0

     

    Table 4.11 Export Price Index
    Type of indexOutput price index
    PurposeThe Export Price Index (EPI) measures changes in the prices received for 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 received for exports actually shipped during that quarter.
    Major usesTo support the compilation of the Australian National Accounts and the Balance of Payments. More specifically to deflate merchandise trade values when calculating chain volume measures (CVM’s) and the calculation of CVM’s of exports on a Balance of Payments basis. Form part of the suite of producer price Indexes (PPI’s), used in contractual agreements and an indicator of our terms of trade.
    Pricing basisIn general, prices are obtained from major exporters of the selected products included in the index. The prices used in the index are free on board (f.o.b.) at Australian ports of export, i.e: the price at which the products physically leave Australia. 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 currencies other than Australian dollars. Forward exchange cover is excluded from the prices used in the index.
    Classification systemProducts in the EPI are primarily classified according to the Australian Harmonised Export Commodity Classification (AHECC). Secondary Index numbers are produced and published according to other classifications; (i) The Standard International Trade Classification (SITC), Revision 4; (ii) ANZSIC (industry of origin basis); and (iii) the Balance of Payments Broad Economic Category Classification (BoPBEC).
    Composition and weightingThe 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 sourced from International Merchandise Trade. For example, data from the years 2019/20 and 2020/21 are combined to inform the selection of products and to derive their weights for the index in 2021/22.
    Weight reference period

    The weight reference period spans the preceding two years. For example, the 2021/22 financial year indexes have a weight reference period that spans the 2019/20 and 2020/21 financial years.

    Link periodJune quarter each year
    Index reference period2011-12=100.0
    Table 4.12 Import Price Index
    Type of indexInput price index
    Purpose

    The Import Price Index (IPI) measures changes in prices paid for imports of merchandise into Australia. The index numbers for each quarter relate to prices paid for imports landed in Australia during the quarter.

    Major uses

    To support the compilation of the Australian National Accounts and the Balance of Payments. More specifically to deflate merchandise trade values when calculating chain volume measures (CVM’s) and the calculation of CVM’s of imports on a Balance of Payments basis. Form part of the suite of producer price Indexes (PPI’s), used in contractual agreements and an indicator of our terms of trade.

    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.

    Classification system

    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 currencies other than Australian dollars. Forward exchange cover is excluded from the prices used in the index.

    Composition and weighting

    The Standard International Trade Classification (SITC), Revision 4 is the primary classification system for the IPI.

    Weight reference period

    As a result, there has been no material impact on the indexes, which remain comparable across the changes in classification. Secondary Index numbers are produced and published according to other classifications; (i) ANZSIC (industry of origin basis); (ii) the Balance of Payments Broad Economic Category Classification (BoPBEC); and (iii)  the international Harmonised System (HS).

     

    The IPI is an annually reweighted chained Laspeyres index. Products are selected based on their value of exports in the preceding year. Their weights are derived from the same value of import sourced from International Merchandise Trade. For example, data from the year 2020/21 inform the selection of products and to derive their weights for the index in 2021/22.

     

    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 periodJune quarter each year
    Index reference period2011-12=100.0

     

    Use of Price Indexes

    This section of the publication provides users with a detailed breakdown of the key users and use of the Producer and International Trade Price Indexes.

    National Accounts and Balance of Payments – Deflation Principle

    The Producer and International Trade Price Indexes are used to deflate values of a number of components in the Australian National Accounts, including industry inputs and outputs, sales, capital expenditure and inventory data to produce chain volume measures. The deflation process is integral to the compilation of Gross Domestic Product and its components. In addition, International Trade Price Indexes are used in the compilation of Balance of Payments Chain Volume Measures.

    Price deflation is achieved by dividing the current price value for a period (quarter or year) by a measure of the price component (usually in the form of a price index) for the same period. This technique re-values the current price value in the prices of a base period (in the Australian volume measures this is generally the previous year)¹.

    Revaluation of the current period values using earlier period prices is defined in the following format:

    \(\frac{V^t}{\big(\frac{P^t}{P^{t-1}}\big)}=P^{t-1}Q^t\)

      \(\Delta Q=\frac{P^{t-1}Q^t}{P^{t-1}Q^{t-1}}\)

    Where \(V\) refers to value, \(P\) refers to price, \(Q\) refers to quantity (or in National Accounts terminology, volume), and the superscripts \(t \space t-1\) refer to current and previous periods respectively.

    More information on the use of price indexes in the production of the Australian National Accounts can be found through the following sources:

    Footnotes

    ¹ The result is, in concept, equivalent to quantity revaluation (i.e. directly revaluing individual products by multiplying their quantity produced or sold in each period by their price in a related base period), since it removes changes in the price component of the current price value, leaving a measure that reflects the volume (or quantity) component valued at the base period prices. 

    National Accounts and Balance of Payments – Derived Measures

    The following is a list of derived statistical measures produced by the Australian National Accounts branch using the Producer and International Trade Price Indexes as inputs.

    Chain Price Indexes and Implicit price deflators

    Chain Price Indexes published quarterly in the Australian National Accounts are annually re-weighted. Chain Price Indexes are obtained by first weighting together elemental price indexes from the previous financial year to the current financial year to produce annual indexes, or to quarters in the current financial year to produce quarterly indexes, where the weights are calculated using expenditure shares of the previous financial year. Second, the resulting aggregate year-to-year or year-to-quarter price indexes are linked (compounded) together to form a time series. Third, the time series is referenced to 100.0 in the reference year. All quarterly indexes are benchmarked to annual indexes.
     

    In addition to the Chain Price Indexes published for the major Australian National Accounts aggregates, the ABS publishes a range of Implicit Price Deflators.

    An Implicit Price Deflators is obtained by dividing a current price value by its real counterpart (the Chain Price Indexes). When calculated from the major national accounting aggregates, such as Gross Domestic Product, Implicit Price Deflators relate to a broader range of goods and services in the economy than that represented by any of the individual price indexes published by the ABS. Movements in an Implicit Price Deflator both changes in price and changes in the composition of the aggregate for which the deflator is calculated.

    Implicit Price Deflators do not compare the price of a constant basket of products (goods and services) between any two periods. Implicit Price Deflators calculated from quarterly aggregates are more likely to be affected by changes in the physical composition of those aggregates. As much of the period-to-period change in the physical composition is of a seasonal nature, Implicit Price Deflators derived from seasonally adjusted data are normally more reliable measures of price change than those calculated from unadjusted data.

    However, seasonally adjusting the series may not completely eliminate the impact of seasonal changes on the derived Implicit Price Deflators.

    Implicit Price Deflators are weighted using current period weights and are conceptually a Paasche price index.

    Implicit Price Deflators and Chain Price Indexes are published for expenditure components of Gross Domestic Product.

    Chain Price Indexes and Implicit Price Deflators are published quarterly as part of Australian National Accounts: National Income, Expenditure and Product, and Balance of Payments and International Investment Position, Australia .

    Period-to-period movements in fixed-weight price indexes are generally consistent with those for Chain Price Indexes for indexes with similar coverage. The Chain Price Indexes are considered the most suitable indexes for measuring actual price change, as the effects of compositional change are excluded from these indexes whereas Implicit Price Deflators are affected by compositional change. Both Chain Price Indexes and Implicit Price Deflators s are subject to ongoing revisions, in line with revisions to underlying Gross Domestic Product weights.

    Commercial indexation

    charges to take account for changes in the prices of products. The use of ABS price indexes for commercial indexation is often taken due to the intendent nature of the ABS which allows business and government to view the Producer and International Trade Price Indexes as ‘independent indicators’. The use of price indexes for indexation is common in long-term contracts across industry and government.

    While the ABS recognises that the price indexes it produces are used for commercial purposes, the ABS neither endorses nor discourages such use. The ABS does not advise, comment, or assist in preparing or writing contracts.  

    For further information on the ABS policy concerning the use of price indexes for contract indexation purposes please refer to – Inflation and Price Indexes – Use of Price Indexes in Contracts

    Economic Monitoring – Domestic

    The Producer and International Trade Price Indexes are used by Australian Commonwealth, State and Territory governments, industry, and academics for economic monitoring, reporting and modelling purposes. As broad economy based and industry level price indicators, the Producer and International Trade Price Indexes are an important source of information for inflation monitoring for the Australian economy and are regularly used to inform government and industry policy and investment decisions. 

    Economic Monitoring – International

    The ABS provides the Australian Producer and International Trade Price Indexes to a range of international agencies, including the International Monetary Fund and the Organisation for Economic Co-operation and Development to enable economic monitoring and international comparisons.

    The provision of the Producer and International Trade Price Indexes to the International Monetary Fund also fulfils Australia’s obligations as part of the International Monetary Fund’s Dissemination Standards Bulletin Board. The IMF Dissemination Standards Bulletin Board set out criteria concerning the statistics to be produced, their periodicity, release procedures etc. A brief overview of these standards can be found on the IMF Dissemination Standards Bulletin Board.

    The International Monetary Fund - Special Data Dissemination Standard contains the main economic and financial statistics produced by the ABS and other agencies, such as the Reserve Bank of Australia.

    The Organisation for Economic Co-operation and Development publishes an array of economic and financial statistics produced by the ABS in comparison to the member countries of the organisation, and also the Purchasing Power Parity statistics, which the Producer and International Trade Price Indexes are incorporated within.

    Biases in Price Indexes

    A price index may be described as biased if it produces estimates that depart consistently from the 'true' measure as a ‘pure price index’. There are several methodological and practical issues that may give rise to a biased price index and these forms of bias are outlined below, together with the review and maintenance strategy employed in such situations.

    Elementary Index Bias

    Elementary index bias (or within elementary aggregate (EA) bias) results when the formulae used to compile index numbers at the elementary aggregate level does not allow index movements to appropriately reflect substitution behaviour.

    For example, consider an illustrative model for the an output price index, where producers have fixed inputs. Under this model, it is assumed producers aim to sell more high-priced products as opposed to lower-priced products. This behaviour is revenue maximising (and for fixed inputs revenue maximising is profit maximising, an expected behaviour of producers). A fixed basket price index measuring price changes for this economic model would exhibit bias. This bias arises because the quantities in the basket are fixed, but the behaviour exhibited in the marketplace has producers selling more of the relatively more expensive products - that is, quantities change. The failure of the price index to account for this shift is the extent to which the index is biased.

    For an input price index example, consider an illustrative model where producers have fixed outputs. Under this model, it is assumed producers aim to purchase more low-priced intermediate inputs as opposed to higher-priced products. This behaviour is cost minimising (and for fixed outputs, cost minimising is profit maximising, an expected behaviour of producers). A fixed basket price index measuring price changes for this economic model would exhibit bias. This bias arises because the quantities in the basket are fixed, but the behaviour exhibited in the marketplace has producers purchasing more of the relatively more of the cheaper products - that is, quantities change. The failure of the price index to account for this shift is the extent to which the index is biased.

    There are two strategies that can be adopted to further protect these price indexes from elementary aggregate bias. The first of these strategies is to frequently update the weights in the basket (assuming we are using the Lowe price index, with differentially weighted specifications). This can be achieved through regular sample maintenance.

    The second strategy that can be employed is to adopt a different price index formula that better reflects such behaviour. The Jevons, or geometric mean, price index is a formula that is unbiased if the price behaviour is¹, a condition which is not universally applicable for every product.

    "Between Component" substitution bias

    Substitution bias arises from using formulae at levels above the elementary aggregates which do not allow for substitution in response to changes in relative prices. Substitution may occur outside elementary aggregates in response to price changes or changes in taste. For example, producers may substitute between natural and synthetic fibres, between steel and ceramic parts for machinery, between wooden and aluminium window frames and so forth. This substitution again results in a quantity shift, and the failure of a fixed basket price index to account for this shift is again the extent to which the index is biased.

    The sample and index review processes described above result in new components and updated weights and are the key mechanism by which the ABS mitigates between component substitution bias. Industry reports, media and other information sources collected by index managers provides an annual picture of change across all products in the Producer and International Trade Price Indexes, and an assessment of this change allows resources to be targeted to those areas that are most susceptible to this type of bias.

    Outlet/Customer biases

    Outlet/Customer biases occur because the transactions in the elementary aggregates are generally fixed to specific suppliers and/or specific customers. In an input price index, bias occurs when the price index does not detect when purchasers shift from higher cost suppliers to lower cost suppliers for the same product. In an output price index, bias arises when the index does not detect when producers practise price discrimination and shift the sales from customers with lower prices to customers who pay higher prices for the same product.

    The bias that arises due to change in supplier or customer is mitigated in several ways in the Producer and International Trade Price Indexes. For the Input to the Manufacturing Industries Producer Price Index, prices are generally observed by surveying the purchaser. If the purchaser changes supplier (and pays a lower price) then this is detected in the quarterly Survey of Producer Prices and, after being adjusted for any appropriate quality changes, appears as a movement in the price index. Similarly, for the output price indexes, prices are generally observed by surveying the producer, and any price rises resulting from changes to new customers will similarly appear in the price indexes. Much but not all of the risk of bias is mitigated by this approach to sample selection.

    There are two situations where potential biases can arise.

    The first is in the Input to House Construction Producer Price Index. This input price index measures prices paid by builders by surveying the businesses supplying the products rather than the builders themselves. This practise is far more practical and efficient than attempting to survey a sample of individual builders. However, one drawback to this approach is that this price index becomes susceptible to outlet (supplier) substitution bias. For example, if builders begin purchasing from a chain wholesaler outside the sample that offers materials at substantial discount, the price index would exhibit an upward bias.

    The second case where biases arise is where counterpart pricing is utilised. Counterpart pricing is a term used to reflect using a transaction price observed on a pricing basis that differs from the conceptual base of the price index. For example, within the manufacturing price indexes, some suppliers provide the prices they receive for their products and these are included in the input price index. Aside from the appropriateness of the underlying assumptions regarding distributive trade margins, this practise also has the potential to introduce outlet substitution bias, since it does not always detect when purchasers change their point of supply (at lower prices). A similar issue arises when purchasers provide prices for incorporation into an output index (although in this case the bias is more suitably termed ‘customer substitution’).

    Regardless of where such practises occur, the potential for bias is mitigated through index reviews and sample maintenance reviews. As detailed above, such reviews measure expenditure and revenue for different products and involve consultation, both with industry bodies and producers themselves. Regular activity of this kind detects changes in sales or purchasing markets and allows price indexes to be updated to reflect the shift in the quantities and revenue/expenditure.

    Quality adjustment bias

    Failure to adequately adjust prices to account for changes to quality results in volume changes being inappropriately measured as price changes, with a resulting bias in the price index. Pricing to constant quality, and the mechanisms by which quality adjustments are made, are described in detail in the Quality change section.

    With a set of tools to enable quality adjustments to be made, the remaining risk for quality adjustment bias occurs through failing to detect changes in products or conditions of sale. This risk is mitigated through forms design of the Survey of Producer Prices, and through the initial enrolment process for selected providers. As described above, a key feature of the enrolment process is to convince selected providers of the importance of pricing to constant quality. Capturing the detailed specification of products together with their condition of sale is also protection against quality change since it allows providers to inform the ABS directly of variations in characteristics.

    New product bias

    The issues surrounding new products were discussed in the Quality change section, which noted that the bias arising from the introduction of new products is exacerbated through delays in introducing such products into the price basket. Sample reviews and index reviews provide opportunities to incorporate new products into the price baskets. If such reviews are carried out regularly, the risk from the emergence of new products is substantially mitigated. Sample reviews and index reviews provide further protection against new product bias in that they allow an assessment of market trends and conditions.

    Footnotes

    ¹ “Unit elasticity” means that quantities respond proportionally to changes in prices, such that value remains constant. For example, if 5 units of a product are sold at $4.00 each, the value is 5 x $4 = $20. If a price rise of 25% to $5.00 sees a commensurate fall of 20% in the units sold, or 1 unit, so that 4 units are exchanged, the total value is then 4 x $5 = $20. In these circumstances, the total value is constant and the product is exhibiting unit elasticity. This approach is used in the PPIs and ITPIs when markets are evolving very quickly, or detailed level value data is unavailable in a timely manner. Such a strategy is often adopted only in those cases where the price behaviour is reasonably matched by the properties of the index formula. 

    As per the “Choosing an index number formula” found in the Price index theory section, other factors aside from elasticity are also useful in determining suitability of index formulae.

    Maintaining Relevance

    It is not possible to construct an index which includes every transaction of every product and so the ABS selects representative products and transactions and determines their relative importance in calculating overall price movements. The Producer and International Trade Price Index product selections and their weights are fixed over time; however, they cannot remain fixed indefinitely. Periodic updates to both the sample and weights are required to maintain relevance of the Producer and International Trade Price Indexes, especially given the nature of producers to change their products, inputs, customers and condition of sale, or disappear (or enter) the marketplace. Maintenance and review programs are required to ensure that price indexes continue to be representative.

    Maintenance is an on-going activity which targets the price sample within each elementary aggregate and is undertaken in response to changes identified through regular analysis and interactions with providers. Periodic reviews look beyond individual price samples to a wide ranging assessment of structure, weights and methods and are initiated by the ABS to reflect new or emerging challenges across the economy.

    Review strategies are described in relation to the structure of the index, as illustrated in Figure 4.13. Index reviews target the levels of the index at and above the published (or regimen) level. These are undertaken during an update to the weight reference period. Sample reviews assess the components below the regimen level and sample maintenance is concerned with the price sample within each elementary aggregate. 

    FIGURE 4.13 AGGREGATION STRUCTURE AND REVIEW STRATEGIES

    FIGURE 4.13 AGGREGATION STRUCTURE AND REVIEW STRATEGIES
    Review strategies are described in relation to the structure of the index, illustrated in Figure 4.13. Index reviews target the levels of the index at and above the published (or regimen) level. These are undertaken during an update to the weight reference period. Sample reviews assess the components below the regimen level and sample maintenance is concerned with the price sample within each elementary aggregate. 

    Index Reviews

    The division of the price index according to the regimen level is at the centre of the ABS strategy for reviewing and maintaining price samples. The structure and weighting data remain fixed for the price index at the regimen level and above, until such time as a process known as an index review is undertaken.

    The outcome of an index review is a change to the representative industries and products, their relative importance as reflected by their value aggregates, and the way the industries and products relate to each other through classifications and the aggregation structure. Such a review is undertaken as required, since it can be a costly and complex exercise. Index reviews are typically undertaken when new weighting data become available, and when such data indicate significant shifts in patterns of revenue or expenditure. Changes to standard classifications can also trigger the need for a review, although such a review still depends upon the availability of value data categorised under the new classification.

    An index review enables the assessment of the scope and coverage of the index. Index reviews also allow the evaluation and implementation of major changes in concept, and the adoption of methodological advances or changes to international best practice.

    Although index reviews are the only activity that changes the weight or structure of an index down to regimen level, they are frequently undertaken simultaneously with sample reviews.

    The last major index review of the Producer and International Trade Price Indexes occurred in 2011-12, and detailed information on the review and its implementation can be sourced through the following links:

    Sample Reviews

    A sample review examines a single index structure below the regimen level. Such a review can introduce new components, change index structures, split or combine price samples, and incorporate new weights for lower level components. Any new value aggregate data introduced must still sum to the value aggregate at the regimen level.

    The key benefit of the sample review strategy is that it can be carried out in isolation from other parts of the price indexes. Classification, value data and market behaviour need to be determined for only the
    branch of the index being reviewed.

    For example, a review of the structure of Australian and New Zealand Standard Industry Classification (ANZSIC) Class 1132 Ice cream manufacturing, a regimen level index, can be undertaken without simultaneously reviewing other ANZSIC Class level indexes or other components of the Output of the Manufacturing Industries Producer Price Index. This means that sample reviews can be done selectively and more often, for more products across more price indexes, when compared to the scale and frequency of an index review.

    The sample review strategy allows reviewing resources to be targeted at those industries of the economy that are undergoing rapid transformation, in terms of what is being produced, how it is being produced, and how it is being sold. This allows indexes to be updated to adequately represent new products, shifts in market share, changes in production function, product substitution, and changes in both customer types and suppliers.

    Sample reviews also allow periodic reassessment of industry pricing mechanisms - the manner in which producers charge for their products - so that the pricing methods detailed in product specifications adequately capture the behaviour in the marketplace. Sample reviews also allow assessment of different pricing methods to reflect emerging international best practise, or to adopt consistently new techniques to price to constant quality.

    The sample review process involves:

    • an assessment and evaluation of issues effecting a price index
    • gathering of information such as international best practice and feedback from users
    • consultation with regulators, industry bodies and providers
    • identification of sources for weight and price data
    • evaluation of potential approaches to price measurement, index and sample design.

    Sample reviews are prioritised by taking into consideration available resources, the relevance of the index and the importance of the index both in terms of its weight within Producer and International Trade Price Index structures and their use as a deflator within the Australian National Accounts and Balance of Payments.

    Sample reviews make a broad level assessment of specifications in a sample, however the sample review activity itself does not change specifications within an elementary aggregate - this will done in the process of sample maintenance, an activity which is often undertaken simultaneously with sample review.

    Sample Maintenance

    Updating specifications, adding different products, removing transactions that are no longer representative, changing providers or changing the micro-index weights are all part of the within-elementary aggregate activity known as sample maintenance.

    Regular updating of micro-index weights is necessary, for example, to reflect changing market share or capture substitution behaviour (producers selling more of their relatively more expensive products). Specifications need to change due to a change in the conditions of sale or the product description (such changes also necessitate a quality adjustment).

    Sample maintenance is undertaken in conjunction with a sample review, however it is usually an activity that is undertaken on a continuous basis, mostly as data are received from providers selected in the Survey of Producer Prices. Such activity changes the contents of the smallest price baskets that contribute to the Producer and International Trade Price Indexes. Although sample maintenance can change the weights of specifications within an elementary aggregate, it does not change the value aggregate associated with an elementary aggregate.

    Maintaining Relevance in the International Trade Price Indexes

    For the ITPIs, new products are identified through the analysis of data from International Merchandise Trade Statistics. These data are particularly useful since they not only highlight the emergence of new products but also the value of sales and purchases, indicating the importance of any new product

    Product selections and their weights are revised annually based on trade data sourced from International Trade in Goods and Services, Australia (cat. no. 5368.0). Merchandise trade statistics on an international merchandise trade basis are compiled from information submitted by exporters and importers or their agents to the Department of Home Affairs.

    Publication Release

    Core Release Information

    The Producer Price Indexes, and International Trade Price Indexes statistics are  published via the ABS website. The website provides the following information free of charge: 

    the main findings from the statistical releases

    • all publication tables in the publications, downloadable in Microsoft Excel format
    • a range of additional tables containing all available PPIs and ITPIs downloadable in Microsoft Excel format.

    The Producer and International Trade Price Indexes are released on a quarterly basis to coincide with the compilation of Australian National Accounts and the Balance of Payments.  

    The publication quarters are:

    • Three months ending March (January, February and March)
    • Three months ending June (April, May and June)
    • Three months ending September (July, August and September)
    • Three months ending December (October, November and December)

    The publication is released no later than 33 days after the end of the reference quarter with the International Trade Price Indexes, Australia is released on a Thursday and Producer Price Indexes, Australia is released on a Friday.

    Interpreting the Release

    This section of the publication provides users with detailed information on how they can interpret the published data outputs within the Producer Price Indexes, and International Trade Price Indexes releases.

    Determining Index Numbers and Percentage Change

    Movements in indexes from one period to any other period can be expressed either as changes in index points or as percentage changes. The following example illustrates these calculations for an index series between Period 1 (P1) and Period 1 (P1). The same procedure is applicable for any two periods.
     

    Table 4.14 Index points and percentage change
     Index numbers
    P2101.1
    less P194.7
    equals change in index points6.4
    Percentage change = 6.4 / 94.7 x 1006.8%

    For most applications, movements in price indexes are best calculated and presented in terms of percentage change. Percentage change allows comparisons in movements that are independent of the level of the index. For example, a change of 2 index points when the index number is 120 is equivalent to a change of 1.7%, but if the index number were 80 a change of 2 index points would be equivalent to a change of 2.5% - a significantly different rate of price change. Only when evaluating change from the reference period of the index will the points change be numerically identical to the percentage change.

    The percentage change between any two periods must be calculated, as in the example above, by direct reference to the index numbers for the two periods. Adding the individual quarterly percentage changes will not result in the correct measure of longer-term percentage change. That is, the percentage change between, for example, the June quarter one year and the June quarter of the following year will not necessarily equal the sum of the four quarterly percentage changes. The error becomes more noticeable the longer the period covered and the greater the rate of change in the index. This can readily be verified by starting with an index of 100 and increasing it by 10% (multiplying by 1.1) each period. After four periods, the index will equal 146.4 delivering an annual percentage change of 46.4%, not the 40% obtained by adding the four quarterly changes of 10%.

    Although the Producer and International Trade Price Indexes are compiled and published as a series of quarterly index numbers, their use is not restricted to the measurement of price change between particular quarters. A quarterly index number can be interpreted as representing the weighted average price during the quarter (relative to the reference period), index numbers for periods spanning more than one quarter can be calculated as the simple (arithmetic) average of the relevant quarterly indexes. For example, an index number for the year 1998 would be calculated as the arithmetic average of the index numbers for the March, June, September and December quarters of 2021.

    This characteristic of index numbers is particularly useful. It allows for comparison of average prices in one year (calendar or financial) with those in any other year. It also enables prices in, say, the current quarter to be compared with the average prevailing in some prior year.

    Determining Index numbers and points contribution

    The quarterly change in a price index represents the weighted average price change of all the product groups included in that index. Publication of index numbers and percentage changes for components of the broad price indexes are useful in their own right. However, these data are often not sufficient to enable important contributors to overall price change to be reliably identified. What is required is some measure that encapsulates both a product group’s price change and its relative importance in the index.

    If a broad level index number is thought of as being derived as the weighted average of the indexes for all its component product groups, then the index number for a component multiplied by its weight to the broad level index results in what is called its ‘points contribution’. It follows that the change in a component item’s points contribution from one period to the next provides a direct measure of the contribution to the change in the broad level price index resulting from the change in that component’s price. This relationship only applies if all components have the same reference period and the same link period. Calculation of points contribution is covered in more detail above, whilst reference period and link periods are discussed in the linking and re-referencing section above.

    Information on points contribution and points contribution change is of immense value when analysing sources of price change and for answering ‘what if’ type questions. Consider the following data from the Export Price Index publication (see Table 4.15):

    Table 4.15 Selected values form ITPI publication, December quarter
     Index numbersPercent changePoints contributionPoints change
     Sep qtrDec qtr Sep qtrDec qtr 
    Total exports90.588.3-2.490.588.3-2.2
    Mineral fuels91.084.2-7.525.6823.76-1.92

    Using only the index numbers themselves, the most that can be said is that between the September and December quarters, the price of mineral fuels exports fell by more than the overall Export Price Index (by 7.5% compared with a rise in total exports of 2.4%). The additional information on points contribution and points change can be used to:

    • Calculate the effective weight for mineral fuels in the September and December quarters (given by the points contribution for mineral fuels divided by the total exports index). For September, the weight is calculated as 25.68/90.5 x 100 = 28.38% and for December as 23.76/88.3 x 100 = 26.91%. Although the underlying quantities are held fixed, the effective weight in export revenue terms has fallen due to the prices of mineral fuels increasing by less than the prices of all other products in the Export Price Index basket (on average)
    • Calculate the percentage change that would have been observed in the Export Price Index if all prices other than those for mineral fuels had remained unchanged (given by the points change for mineral fuels divided by the total exports index number in the previous period). For December quarter this is calculated as 1.92/90.5 x 100 = 2.12%. In other words, a 7.5% fall in mineral fuels export prices in December quarter would have resulted in a fall in the overall Export Price Index of 2.12%
    • Calculate the average percentage change in all other items excluding mineral fuels (given by subtracting the points contribution for mineral fuels from the total exports index in both quarters and then calculating the percentage change between the resulting numbers - which represents the points contribution of the ‘other’ products). For the above example, the numbers for total exports excluding mineral fuels are: September, 90.5 - 25.68 = 64.82; December, 88.3 - 23.76 = 64.54; and the percentage change, (64.54 - 64.82)/ 64.82 x100 = -0.43%. In other words, prices of all exports other than mineral fuels fell by 0.43% on average between the September and December quarters.
    • Estimate the effect on the Total Exports of a forecast change in the prices of one of the products (given by applying the forecast percentage change to the products points contribution and expressing the result as a percentage of the total exports index number). For example, if prices of mineral fuels were forecast to rise by 25% in March quarter 2022, then the points change for mineral fuels would be 23.76 x 0.25 = 5.94, which would deliver a rise in the total exports index of 5.94/88.3 x 100 = 6.7%. In other words, a 25% rise in mineral fuels prices in March quarter 2021 would have the effect of increasing the EPI by 6.7%. Another way commonly used to express this impact is “a 25% rise in the price of mineral fuels would contribute 6.7 percentage points to the change in the total exports EPI”.

    Points contribution, re-weighting and link periods

    The use of points contribution as an analytical tool is limited to comparison of those index numbers on the same weighting reference period. If a price index is rebased (and its weighting basis changed), it will not be possible to compare points contribution data on the old weighting basis with data from the new weighting basis. This means it is not possible to undertake points contribution analyses across a link period. Linking of price indexes is discussed in detail in the linking and re-referencing section above.

    This limitation has particular impact on the International Trade Price Indexes, since these price indexes are re-weighted every year (with June quarter as the link period). This means that points contribution analyses cannot be undertaken, for example, in comparing price indexes from September quarter with price indexes from March quarter of the same calendar year. Such an analysis would bridge the June quarter link period and is therefore not possible.
     

    Quarterly and annual data

    Price index figures are published on a quarterly, annually and a financial year basis. The index number for a financial year is the simple arithmetic average (mean) of the index numbers for the 4 quarters of that year. Index numbers for calendar years are not calculated by the ABS but can be derived by calculating the simple arithmetic average of the quarterly index numbers for the year concerned.

    Precision and rounding

    To ensure consistency in the application of data produced from the price indexes, it is necessary for the ABS to adopt a set of consistent rounding conventions or rules for the calculation and presentation of data. These conventions strike a balance between maximising the usefulness of the data for analytical purposes and retaining a sense of the underlying precision of the estimates. These conventions need to be considered when using price index data for analytical or other special purposes.

    Index numbers are always published to a reference of 100.0. Index numbers and percentage changes are always published to one decimal place, with the percentage changes being calculated from the rounded index numbers. Points contributions are published to two decimal places, with points contributions change being calculated from the rounded points contributions. Index numbers for periods longer than a single quarter (e.g. for financial years) are calculated as the simple arithmetic average of the relevant rounded quarterly index numbers. Percentage changes between these periods are calculated from the rounded average index numbers.

    The suite of price indexes

    The Producer and International Trade Price Indexes are part of a broader system of price statistics produced by the ABS that apply to different aspects of the economy.

    The suite of price indexes currently released by the ABS are: 

    Below is a summary of the other suite of price statistics compiled by the ABS. They provide an integrated and consistent view of price developments pertaining to production, consumption, and international transactions of products within the Australian economy.

    Consumer Price Index

    The Consumer Price Index measures quarterly changes in the price of a 'basket' of goods and services which account for a high proportion of expenditure by the Consumer Price Index population group (i.e. metropolitan households). This 'basket' covers a wide range of goods and services, arranged in the following eleven groups:

    • Food and non-alcoholic beverages
    • Alcohol and tobacco
    • Clothing and footwear
    • Housing
    • Furnishings, household equipment and services
    • Health
    • Transport
    • Communication
    • Recreation and culture
    • Education
    • Insurance and financial services.

    Capital city indexes used by the Consumer Price Indexes are based on the 2011 Australian Statistical Geography Standard Greater Capital City Statistical Areas. The capital city indexes measure price movements over time in each city individually. They do not measure differences in retail price levels between cities.

    The Consumer Price Index is published quarterly in the Consumer Price Indexes, Australia release.

    Selected Living Cost Indexes

    The Consumer Price Index is deconstructed into various secondary and tertiary indexes known the Selected Living Cost Indexes.

    The Selected Living Cost Indexes provides indexes for four individual population subgroups:

    • Employee households;
    • Age pensioner households;
    • Other government transfer recipient households; and
    • Self-funded retiree households.

    Also included are the:

    • Pensioner and Beneficiary Living Cost Index which provides an index for age pensioner and other government transfer recipient households whose principal source of income is government benefits; and
    • Analytical Living Cost Indexes which provide the impact of price change across different groups of households in the Australian population

    The Selected Living Cost Indexes  are published quarterly in the Selected Living Cost Indexes, Australia release.
     

    Residential Property Price Index

    The Residential Property Price Index measures changes in prices of all residential dwellings within the eight capital cities, defined by the 2011 Australian Statistical Geography Standard Greater Capital City Statistical Areas.

    Residential property price indexes measure price change of the stock of residential dwellings over time.

    The indexes serve the dual purpose of:

    • a macroeconomic indicator of residential property price change.
    • supporting the compilation of the non-financial assets component of the household balance sheet in the Australian System of National Accounts.

    The Residential Property Price Index is published quarterly in Residential Property Price Indexes: Eight Capital Cities release.

    Wage Price Index

    The Wage Price Index contains indexes measuring changes in the price of wages and salaries in the Australian labour market.

    Individual indexes are compiled for various combinations of state/territory, sector (private/public) and industry division. Industry is classified according to the Australian and New Zealand Standard Industrial Classification. Four Wage Price Indexes are constructed and published quarterly and cover:

    • ordinary time hourly rates of pay excluding bonuses index
    • ordinary time hourly rates of pay including bonuses index
    • total hourly rates of pay excluding bonuses index
    • total hourly rates of pay including bonuses index.

    The Wage Price Index is published quarterly in Wage Price Index, Australia.

    Equity of access

    The Producer and International Trade Price Indexes statistics are made available simultaneously to everyone via the ABS website. This approach supports the principle of equity of access.

    All statistics are subject to an embargo until 11.30 a.m. (Canberra time) on the day of release. No information about the price indexes is publicly available prior to the lifting of the embargo.

    Revisions

    Revisions are only applied if the effect of the amended or revised data is significant. In the event of a revision the affected data will be highlighted in the publication, with a reason for revision provided in the commentary.

    Chapter 5 Historical and background

    Introduction

    This section of the release provides a detailed history of the development and changes of each price index within the current and historical suite of Producer and International Trade Price Indexes.

    Economy-wide Producer Price Indexes

    The headline measure for the Producer Price Indexes is the Final Demand (Excl. exports) Producer Price Index series. It is an economy wide price measure and is derived from the former Stage of Production (SOP) framework that was developed for the Producer Price Index publication. The SOP framework has been largely discontinued with the Final Demand (Excl. exports) price index the only remaining indicator from the framework currently in production.

    This section provides a summary of the development of the SOP framework and its underlying methodology, which continues to inform upon the Final Demand (Excl. exports) Producer Price Index series.

    Whole of economy measures

    The Producer Price Indexes are largely a collection of industry-based price statistics that together, do not provide a whole of economy perspective of supply side price change for users. In response to this limitation in the Producer Price Indexes, the ABS developed a set of economy wide price indexes using a Stage of Production approach.

    Final Demand and the Stage of Production Approach

    Under the Stage of Production 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.

    Transactions (flows of products) are placed in one of three stages:

    • Stage 3 (Final) becomes Final Demand, i.e. products consumed as Final Demand, with no further processing
    • Stage 2 (Intermediate) becomes Intermediate Demand, i.e. products consumed as inputs into the production of Final Demand
    • Stage 1 (Preliminary) becomes Preliminary Demand, i.e. products consumed as inputs into the production of Intermediate Demand.

    Re-weights:

    • 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.
    • March quarter 2022 the Final Demand index weights were updated using data from the 2018–19 Australian National Accounts: Input–Output (I–O) Tables.

    Image 5.1 Stage of production process

    Image 5.1 Stage of production process
    Illustrates the three stages of production:
    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.

    The three stages of production 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.

    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.

    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

    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 of demand.

    Scope and Coverage

    As the focus is on domestic inflation, exports are excluded from the headline ‘Final Demand', as presented in the key figures on the front page and in Tables 1 & 5 in the quarterly publication. 

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

    The Final Demand concept incorporates all flows of transactions within the economy and it measures prices in basic prices, as it is an output price index.

    Products and weights

    The basis of the weights for Stage of Production framework is the use table from the Australian National Accounts: Input-Output Table framework. The products included in the stages, for both domestic supply and imports are given proportional weights that reflect the values of product flows.

    The current methodology used for deriving Stage of Production weights can be found in Appendix 2 of the Implementation of the Review of the Producer and International Trade Price Indexes, 2012.

    From the September quarter 2015 the Stage of Production indexes weights were updated using data from the 2012–13 Australian National Accounts: Input–Output Tables.

    Historical development and changes

    Producer Price Indexes for the supply of products to the Australian economy within a Stage of Production framework were first published in Stage of Production Producer Price Indexes, Australia. The Stage of Production indexes enable analysis of the pass through of price change of output products to the price change of final products. This publication commenced in July 2000 and presented price indexes compiled from September 1998. The Stage of Production index model brings together the range of detailed price data contained in the separate industry indexes to enhance the analytical value of the data. The Stage of Production framework is based on an economic categorisation of transactions according to their sequencing in the production chain.

    These indexes are compiled within the statistical framework outlined in the Information Paper: An Analytical Framework for Price Indexes in Australia, 1997 and were designed to support the study of price inflation.

    A more detailed explanation of the Stage of Production concept is contained in the Information Paper: Producer Price Index Developments was released on 25 March 1999.

    The weights of the indexes were initially sourced from the 1994-95 Australian National Accounts: Input–Output Tables and presented with an index reference period of 1998-99 = 100.0.

    The Stage of Production indexes were reviewed in 2002 and the changes introduced from the December quarter 2002. The weights of the revised series were sourced from the 1996-97 Australian National Accounts: Input–Output Tables.

    Following the Outcome of the Review of the Producer and International Trade Price Indexes, 2012 and the subsequent  Implementation of the Review of the Producer and International Trade Price Indexes, 2012, the weights were updated with data sourced from the 2007-08 Australian National Accounts: Input–Output Tables in the September quarter 2012 and the indexes were re-referenced to 2011-12 = 100.0.

    In addition, the Stage of Production indexes were reclassified to align with the Australian and New Zealand Standard Industrial Classification, 2006. The implementation of the updated classification model resulted in some restructuring and/or renaming of previous Australian and New Zealand Standard Industrial Classification, 1993 series and the discontinuation of old series and introduction of new series. However, while the underlying concepts have remained unchanged, the Stage of Production stages were renamed to reflect the relationship of the stages of production:

    • Stage 3 (Final) became Final Demand, i.e. products consumed as Final Demand, with no further processing
    • Stage 2 (Intermediate) became Intermediate Demand, i.e. products consumed as inputs into the production of Final Demand
    • Stage 1 (Preliminary) became Preliminary Demand, i.e. products consumed as inputs into the production of Intermediate Demand.

    From 2020, the Stage of Production framework was reduced to Final Demand in the Producer Price Indexes publication with Preliminary Demand and Intermediate Demand discontinued.

    Manufacturing industries Producer Price Indexes

    Output of the Manufacturing industries

    The price indexes of articles produced by manufacturing industries were first published in June 1976 in the Price Indexes of Articles Produced by Manufacturing Industry, Australia (cat. no. 6412.0), with monthly indexes compiled from July 1968. The structure and weights of the indexes were sourced from the value of production in 1971-72 (as reported in the 1971-72 Census of Manufacturing Establishments). The index reference period was 1968-69 = 100.0.

    The index was reviewed in 1990 with changes implemented from May 1990. The weights for this index were sourced from the value of production in 1986-87 (as reported in the 1986-87 Census of Manufacturing Establishments). The index reference period was 1988-89 = 100.0.

    The frequency of these indexes was changed from monthly to quarterly from the September quarter 1997.

    These indexes were again reviewed in 2000. The products included in the indexes were selected based on the values of articles produced in 1993-94. The selected products were allocated weights in accordance with the estimated value of manufacturing production in 1993-94 valued at the prices applicable in the June quarter 2000. The indexes were re-referenced to 1989-90 = 100.0.

    From the September quarter 2000 the presentation of these indexes was changed to reflect the updated weighting patterns and the adoption of ANZSIC 1993. The new weights for the manufacturing division indexes and the associated ANZSIC subdivision and group price indexes were shown in Appendix B of the September quarter 2000 issue of Price Indexes of Articles Produced by Manufacturing Industry, Australia (cat. no. 6412.0).

    The publication Price Indexes of Articles Produced by Manufacturing Industry, Australia (cat. no. 6412.0) was combined with several other PPI publications in the June quarter 2001 to form a new publication Producer Price Indexes, Australia (cat. no. 6427.0). The latter publication presented an economy wide framework for PPIs, with the Stage of Production (SOP) indexes as the headline indicators.

    From the September quarter 2012 the presentation of the indexes was changed to reflect the 2006 edition of ANZSIC and weights were updated using data from the 2007–08 Australian National Accounts: Input–Output (I–O) Tables. The index of articles produced by manufacturing industries, was renamed Output of the Manufacturing industries and the index reference period updated to 2011–12 = 100.0.

    Re-weights:

    • September quarter 2015 the Output of the Manufacturing industries index weights were updated using data from the 2012–13 Australian
    • March quarter 2022 the Output of the Manufacturing industries index weights were updated using data from the 2018–19 Australian National Accounts: Input–Output (I–O) Tables.

    Input to the Manufacturing industries

    The Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0) was first published in April 1975. The index reference period was 1968-69 = 100.0 and had weights sourced from the value of estimated manufacturing materials usage in 1971-72. Monthly index numbers were compiled for the period July 1968 to November 1985. A description of this series, including its composition and weighting pattern, was provided in the April 1975 issue of Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0).

    The indexes were reviewed in 1985, with their composition and weights sourced from values of materials used in manufacturing in 1977-78. The reviewed indexes were introduced from December 1985 with an index reference period of 1984-85 = 100.0.

    The indexes were reviewed again in 1996. This review resulted in several changes to the indexes. The underlying classification of the indexes was changed from the Australian Standard Industrial Classification (ASIC) 1983, to ANZSIC 1993. The composition and weights of the indexes were sourced from values of materials used in 1989-90. The indexes were also re-referenced to 1989-90 = 100.0. Index structures and weights were shown in Appendix A of the July 1996 issue of Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0).

    The frequency of these indexes was changed from monthly to quarterly from the September quarter 1997.

    The Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0) was discontinued and data included in Producer Price Indexes, Australia (cat. no. 6427.0) from the June quarter 2001.

    From the September quarter 2012 the presentation of the indexes was changed to reflect the 2006 edition of ANZSIC and weights were updated using data from the 2007-08 I-O tables. The index of Materials used in manufacturing industries was renamed to Input to the Manufacturing industries and the index reference period updated to 2011-12 = 100.0.

    Re-weights:

    • September quarter 2015 the Input to the Manufacturing industries index weights were updated using data from the 2012–13 Australian National Accounts: Input–Output (I–O) Tables. 
    • March quarter 2022 the Input to the Manufacturing industries index weights were updated using data from the 2018–19 Australian National Accounts: Input–Output (I–O) Tables.

    Price indexes of Copper materials - discontinued

    The price indexes of copper materials were first published in the October 1972 issue of Price Indexes of Metallic Materials (cat. no. 6410.0) as the Price Indexes of Copper Materials Used in the Manufacture of Electrical Equipment. The indexes were published for the period July 1968 to August 1983 and presented with an index reference period of 1968-69 = 100.0. The October 1972 issue of Price Indexes of Metallic Materials (cat. no. 6410.0) and in Labour Report No. 57, 1972 (cat. no. 6101.0) also included the weights of the indexes.

    The publication Price Indexes of Metallic Materials (cat. no. 6410.0) was discontinued from September 1983 to May 1984 due to deficiencies in the price samples.

    Revised indexes with an index reference period of 1983-84 = 100.0 were introduced in June 1984. Data were published monthly, with an historical series from July 1983. The Appendix to the June 1984 issue of Price Indexes of Metallic Materials, Australia (cat. no. 6410.0) provides a detailed description of the revised indexes, including their structure and weights.

    In January 1986, the title of the publication was changed and the series for the other metallic materials (iron and steel, aluminium, copper and brass, and zinc) were included in Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0).

    The indexes have been compiled and released on a quarterly basis since the September quarter 1997.

    In 2002 the indexes were re-weighted using data from the 1998-99 financial year and re-referenced to 1989-90 = 100.0.

    The Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0) (which contained the price indexes of copper materials) was discontinued and indexes published from the June quarter 2001 in the Producer Price Indexes, Australia (cat. no. 6427.0). The price index of copper materials was made available only in electronic form.

    As a result of the PPI and ITPI 2012 Review, two subsidiary indexes; Copper input to the other electrical equipment manufacturing industry and Metallic input to the fabricated metal product manufacturing industry have been discontinued from the September quarter 2013.

    Construction industries Producer Price Indexes

    Output of the Construction industries

    A price index for the Output of the Building Industry was first published in the June quarter 2001 issue of Producer Price Indexes, Australia. The index was published as the aggregate of three Australian and New Zealand Standard Industrial Classification, 1993 industry classes:

    • Class 4111 – House Construction
    • Class 4112 – Residential Building Construction n.e.c.
    • Class 4113 – Non-Residential Building Construction

    The aggregate index was presented with an index reference period of 1998-99=100.0 and the weighting structure was derived from the 1996-97 Australian National Accounts: Input–Output Tables for the national level, and for state and territory weights, Building Activity Construction Survey data for 5 years ending 1998-99 was sourced from the ABS.

    From September 2002, the series for 'Output of the Building Industry', based upon Australian and New Zealand Standard Industrial Classification, 1993 industry Group 411 – Building Construction was published alongside the three industry classes noted above. In addition, a new series for Group 412 – Non-Building Construction was published, which was inclusive of Class 4121 – Road and Bridge Construction.

    A review of the suite of the Output of the Building Industry Producer Price Indexes was undertaken in 2007 with several changes then implemented in the December quarter 2007. The new weights of the indexes at the

    Industry class level for Australia were primarily sourced from the 2001-02 Australian National Accounts: Input–Output Tables. State level weights were sourced from the Building Activity Construction Survey over the 2005-06 calendar years.

    Following the Outcome of the Review of the Producer and International Trade Price Indexes, 2012 and the subsequent  Implementation of the Review of the Producer and International Trade Price Indexes, 2012, the price indexes were renamed from Output of the Building Industry to the Output of the Construction Industries to align with the Australian and New Zealand Standard Industrial Classification, 2006.

    The current suite of the Output of the Construction Industries Producer Price Indexes are:

    • Group 30 – Building Construction
      • Class 3011 – House Construction
      • Class 3019 – Other Residential Building Construction
      • Class 3020 – Non-Residential Building Construction
    • Group 31 – Heavy and Civil Engineering Construction
      • Class 3109 – Other Heavy and Civil Engineering Construction
      • Class 3101 – Road and Bridge Construction

    The weighting basis for the Output of the Construction Industries were updated to the 2007-08 Australian National Accounts: Input–Output Tables at the national level, with state and territory weights derived from the Building Activity Construction Survey over the 2010-11 calendar years. The indexes were also given an updated index reference period of 2011-12 = 100.0.

    The Output of the Construction Industries were re-weighted in 2020 to include the following weighting sources:

    • Building construction indexes were re-weighted at the state and class levels in the June quarter 2020, using BACS, Building Approvals and Engineering construction data.
    • Other residential construction and Other heavy and civil construction indexes were re-weighted at the class level in the March 2020 quarter, using Engineering construction survey data.

    Input to the House construction industry

    The price index of materials used in house building was first published in September 1970 and was presented with an index reference period of 1966-67 =100.0. The weights were sourced from estimated materials usage in 1968-69. Monthly index numbers were compiled for the period July 1966 to September 1986. A description of the index, including its composition and weighting pattern, was given in the Price Index of Materials Used in House Building, Six State Capital Cities (cat. no. 6408.0), and in Labour Report No. 55, 1970 (cat. no. 6101.0).

    The index was reviewed in 1986 and a new series introduced from October 1986. This series was linked to the previous series. This series was presented with an index reference period of 1985-86 = 100.0 with weights sourced from estimated materials usage in 1985-86. A description of this series was provided in the October 1986 issue of Price Index of Materials Used in House Building, Six State Capital Cities (cat. no. 6408.0).

    The index was reviewed in December 1995. It was re-referenced to 1989-90 =100.0 and was linked to the previous series.

    The indexes have been compiled and released on a quarterly basis since the September quarter 1997.

    The Price Indexes of Materials Used in House Building, Six State Capital Cities (cat. no. 6408.0) was discontinued and the index published in Producer Price Indexes, Australia (cat. no. 6427.0) from the June quarter 2001.

    In December 2005, the index was again reviewed. This review saw the structure of the index changed to reflect building material usage observed in the three years ending 2002-03. Capital city weights were updated to reflect building patterns observed in the six state capitals in 2003-04. The resulting weights were price updated to the September quarter 2005 by adjusting each by the ratio of the price in the September quarter 2005 to the average price in 2003-04.

    From the September quarter 2012, this index was renamed from Materials Used in House Building to Input to the house construction industry and re-referenced to 2011-12 = 100.0.

    The Input to the House construction industry price index was re-weighted in the December quarter 2013. The weights for the Input to the House construction industry price index were derived from representative housing construction activity for the average of the three years ending 2010-11. The weighting patterns for each capital city index reflects variations in the prices for the cities as applied to an Australian (6 capital cities) weighted average of house construction inputs. The updated weighting patterns were calculated using bill of quantities data for three years ending 2010-11 obtained from quantity surveyors. These quantities were 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 Input to the House Construction Industry price index were last reweighted in the September 2020 quarter.

    Mining industries Producer Price Indexes

    Input to the Coal mining industry

    The Price Indexes of Materials Used in Coal Mining, Australia (cat. no. 6415.0) was first published in February 1989 and presented with an index reference period of 1987-88 = 100.0. The indexes were compiled for each month from July 1988.

    The indexes have been compiled and released on a quarterly basis since the September quarter 1997.

    In 2001 the indexes were re-weighted to reflect estimated average use of materials in coal mining over the 1999-2000 financial year and re-referenced to 1989-90 = 100.0.

    The Price Indexes of Materials Used in Coal Mining, Australia (cat. no. 6415.0) were discontinued and the data published, from the June quarter 2001, in Producer Price Indexes, Australia (cat. no. 6427.0).

    From the September quarter 2012, this index was renamed from Materials used in coal mining to Input to the coal mining industry and re-referenced to 2011-12 = 100.0.

    Open cut mining and Underground mining have been discontinued and combined into one index for Input to the Coal mining industry as a result of the PPI and ITPI 2012 Review. The index was updated in the September quarter 2013 to ANZSIC 2006 and weights were sourced from the 2007-08 I-O tables.

    Re-weights:

    • September quarter 2015 the Input to the Coal mining industry index weights were updated using data from the 2012–13 Australian National Accounts: Input–Output (I–O) Tables.

    Output of the Mining Industry

    Following the significant development of the Australian domestic and export gas industry, the ABS developed and implemented an Output of the Mining Industry Producer Price Index. The focus of the Output of the Mining Industry Producer Price Index is Australian and New Zealand Standard Industrial Classification, 2006 industry Subdivision 07 – Oil and Gas Extraction.

    The Output of the Mining Industry Producer Price Index release provides three output price index series:

    • Domestic Gas Extraction, Australia
    • Domestic Gas Extraction, East Coast
    • Domestic Gas Extraction, West Coast

    The Output of the Mining Industry was first published in the September 2017 release of the Producer Price Indexes publication. The index measures prices of domestic gas extraction.

    The time series begins in the September quarter 2015 and the index reference period 2015-16 = 100.0.

    For more information on the development and implementation of the Output of the Mining Industry please refer to the following publication - Introduction of the Output of the Mining index.

    Re-weights:

    • March quarter 2022 the Output of the mining industry index weights were updated using data from the 2018–19 Australian National Accounts: Input–Output (I–O) Tables

    Services industries Producer Price Indexes

    Price indexes for the Output of service industries are a comparatively new developments and to date are compiled for a selection of services industries.

    Quarterly price index numbers for services industries were first published in the March quarter 2000 for the Transport (Freight) and Storage Industries (ANZSIC 1993 Division I) and the Property and Business Services Industries (ANZSIC 1993 Division L).

    Indexes were first published in Producer Price Indexes for Selected Service Industries, Australia (cat. no 6423.0). The index structure and weights were sourced from the 1994-95 I-O tables, and presented with an index reference period of 1998-99 = 100.0.

    The Producer Price Indexes for Selected Service Industries, Australia (cat. no 6423.0) was discontinued and the data published, from the June quarter 2001, in the Producer Price Indexes, Australia (cat. no. 6427.0).

    The price indexes for the output of services industries were reviewed in 2002. From the June quarter 2002, the index structure and weights were sourced from the 1996-97 I-O tables. This review also saw significant improvements in coverage of these price indexes.

    Additional service industry price indexes have been developed since September quarter 2012 as part of an ongoing program to improve service industry price measurement. The indexes were also updated in the September quarter 2012 to ANZSIC 2006 and weights were sourced from the 2007-08 I-O tables. The indexes were re-referenced to 2011-12 = 100.0. 

    Re-weights:

    • September quarter 2015 the additional service industries index weights were updated using data from the 2012–13 Australian National Accounts: Input–Output (I–O) Tables.
    • March quarter 2022 the service industries index weights were updated using data from the 2018–19 Australian National Accounts: Input–Output (I–O) Tables.

    International Trade Price Indexes

    Export price index

    Export price measures have been published by the ABS since 1901 and was published annually from 1901 to 1929-30 as a current weighted unit value index and then a fixed weighted index. An index of export prices was not published again until 1937, when a new series was introduced. This series continued until 1962.

    A fixed weighted index was introduced in August 1962 and presented with an index reference period of 1959-60 = 100.0. It was replaced by an interim index that was published from July 1969 until June 1979.

    The next re-reference was to 1974-75 = 100.0 and was published on this basis until August 1990.

    The monthly publication Export Price Index, Australia (cat. no. 6405.0) was introduced in September 1990 and index numbers were compiled from July 1989. The index was referenced to 1989-90 = 100.0.

    The indexes have been compiled and released on a quarterly rather than monthly basis since the September quarter 1997.

    The export price index was reviewed in 1999. The main purpose of the review was to ensure that the index satisfied key user requirements. Information Paper: Review of the Import Price Index and Export Price Index (cat. no. 6424.0) was released in November 1999 and outlined the key objectives of the review and sought user feedback. The broad outcomes of the review are outlined in an Appendix to the June quarter 2000 issue of the Export Price Index, Australia (cat. no. 6405.0). One of the results of the review was a move to an annually re-weighted chained index, whereby each September quarter the weights of the index are updated to reflect the average value of export items in the previous two financial years, due to the greater volatility associated with the value of export items.

    In the June quarter 2001 Export Price Index, Australia (cat. no. 6405.0) was combined with Import Price Index, Australia (cat. no. 6414.0) into a single publication, International Trade Price Indexes, Australia (cat. no 6457.0).

    In the September quarter 2012 the EPI was re-referenced to 2011-12 = 100.0.

    Import price index

    Import price indexes were published by the Reserve Bank of Australia (RBA) from 1928 until September 1982.

    The first index of import prices produced by the ABS was introduced in May 1983. Index numbers were published in Import Price Index, Australia (cat. no. 6414.0). This index was compiled quarterly from the September quarter 1981 until the June quarter 1991 and presented with an index reference year of 1981-82 = 100.0.

    A re-weighted index of import prices was introduced in September 1991 with index numbers compiled monthly from April 1991 until June 1997. This index was referenced to 1989-90 = 100.0. The source of the weights was the average value of merchandise imports landed in Australia during 1988-89 and 1989-90.

    The indexes have been compiled and released on a quarterly basis since the September quarter 1997.

    In 1999, a review of the index was undertaken with the findings published in Information Paper: Review of the Import Price Index and Export Price Index (cat. no. 6424.0). One of the results of the review was a move to an annually re-weighted chained index, whereby each September quarter the weights of the index are updated to reflect the average value of merchandise imports landed in Australia in the previous financial year. From the September quarter 2012, the index is referenced to 2011-12=100.0.

    In the June quarter 2001 Import Price Index, Australia (cat. no. 6414.0) was combined with Export Price Index, Australia (cat. no. 6405.0) into a single publication International Trade Price Indexes, Australia (cat. no. 6457.0).

    In the September quarter 2012 the ITPIs were re-referenced to 2011-12 = 100.0.

    Appendix 1: Contract price indexation

    Introduction

    Price indexes published by the Australian Bureau of Statistics (ABS) provide summary measures of the movements in various categories of prices over time. They are published primarily for use in Government economic analysis.

    Price indexes are also often used in contracts by businesses and government to adjust payments and/or charges to take account of changes in categories of prices (Indexation Clauses).

    This appendix sets out a range of issues that should be taken into account by parties considering including an Indexation Clause in a contract using an ABS published price index.

    The role of the ABS in respect of indexation clauses

    Although the ABS acknowledges that the various price indexes it publishes are used by businesses and government to adjust payments and/or charges, it neither endorses nor discourages such use.

    The role of the ABS as the central statistical authority for the Australian government includes publishing price index data, and broadly explaining the underlying methodology and general limitations on such data. The ABS may provide information on price indexes that it publishes, but will not recommend or comment on the use (or otherwise) of the price indexes. In addition, the ABS does not advise, comment or assist in preparing or writing contracts and nor does it provide advice on disputes arising from contract interpretation.

    Important disclaimer

    This appendix is intended to summarise information about the various price indexes currently published by the ABS and some of the issues which should be considered by persons in deciding to use such price indexes in Indexation Clauses. It is a brief description only and is not a comprehensive or exhaustive description of price indexes or of the issues which should be considered by persons in deciding to use price indexes or Indexation Clauses.

    Neither the ABS, the Commonwealth of Australia, nor their employees, advisers or agents will in any way be liable to any person or body for any cost, expense, loss, claim or damage of any nature arising in any way out of or in connection with the statements, opinions or other representations, actual or implied, contained in or omitted from this paper or by reason of any reliance thereon by any person or body. This appendix is not business, investment, legal or tax advice and persons should seek their own independent professional advice in respect of all matters in connection with the use of price indexes published by the ABS and their use in Indexation Clauses.

    No representation or assurance is given that any ABS published price indexes are accurate, without error or appropriate for use by persons or that the ABS will continue to publish any of the price indexes, publish them at a particular time or that the methodologies for their determination will not be changed or that they will be suitable for use in any Indexation Clauses.

    Price indexes published by the ABS

    The Consumer Price Index (CPI) is regarded as Australia's key measure of consumer inflation. It is designed to provide a general measure of price inflation for the Australian household sector as a whole. The CPI measures changes over time in the prices of a wide range of consumer products acquired by Australian metropolitan households and it is published quarterly, three to four weeks after the end of the reference period. It is revised only in exceptional circumstances, such as to correct a significant error. As is the case with all ABS price indexes, the reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    Several Producer Price Indexes (PPIs) are produced and published. Economy wide indexes are presented within a stage of production framework together with a set of indexes relating to specific industries (selected manufacturing, construction, mining and services industries). PPIs can be constructed as either output measures or input measures. Output price indexes measure changes in the prices of products sold by defined industry groupings while, input price indexes measure changes in the prices of products purchased by a particular industry grouping. PPIs are published quarterly, no later than 33 days after the end of the reference period. Once published, the PPIs are revised infrequently, sometimes to incorporate improved methods in one or more of the components and occasionally to correct an error. As is the case with all ABS price indexes, the reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    The International Trade Price Indexes (ITPIs) are intended to broadly measure changes in the prices of products imported into Australia (the Import Price Index (IPI)) and products exported from Australia (the Export Price Index (EPI)). The prices measured in the indexes exclude import duties, and exclude freight and insurance charges incurred in shipping products between foreign and Australian ports. As the prices used in the indexes are expressed in Australian currency, changes in the relative value of the Australian dollar and overseas currencies can have a direct impact on price movements for the many products that are bought and sold in currencies other than Australian dollars. Both the IPI and EPI are published quarterly, no later than 33 days after the end of the reference period. The IPI and EPI are not often revised. As is the case with all ABS price indexes, the reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    The Wage Price Index (WPI) broadly measures changes in the wages paid by Australian businesses to employees. The WPI is compiled and published quarterly, six to seven weeks after the end of the reference period. Individual indexes are compiled for various combinations of State/Territory, sector (private/public), and broad industry groups. The 'headline' WPI is that for the total hourly rates of pay, excluding bonuses, for Australia, and it is published in original, seasonally adjusted and trend terms. The seasonally adjusted and trend series for some quarters are revised as extra quarters are included in the series analysed for seasonal influences, but the non-seasonally adjusted (i.e. original) series is not revised in normal circumstances. As is the case with all price indexes, the reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    The Residential Property Price Index (RPPI) is designed to provide a measure of the inflation or deflation in the price of the stock of all residential dwellings and is published quarterly, six weeks after the end of the reference period. The 'headline' RPPI is an aggregation of the House Price Index (HPI) and the Attached Dwellings Price Index (ADPI). The HPI provides a measure of the inflation or deflation in the price of the stock of established detached houses over time and the ADPI provides a measure of the inflation or deflation in the price of the stock of attached dwellings over time. Dwellings in scope of the ADPI are: flats, units and apartments; and semi-detached, row and terrace houses. Separate indexes are produced for each capital city in Australia, and these indexes are combined to produce a weighted average index of the eight capital cities. The figures published for the two most recent quarters are regarded as preliminary and are revised in subsequent publications as more data is collected. As is the case with all ABS price indexes, the index reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    The Analytical Living Cost Indexes (ALCIs) are designed to measure the impact of changes in out-of-pocket living expenses of four Australian household types; employee, age pensioner, other government transfer recipient and self-funded retiree households. The ALCIs are an analytical series produced as a by-product of the CPI, with the main conceptual difference being the ALCIs are constructed on an outlays basis, while the CPI is constructed on an acquisitions basis. The ALCI is published quarterly, approximately seven weeks after the end of the reference period. It is revised only in exceptional circumstances, such as to correct a significant error. As is the case with all ABS price indexes, the reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    The Pensioner and Beneficiary Living Cost Index (PBLCI) is designed to assess the impact of changes in out-of-pocket living expenses of households whose principal source of income is government pensions and benefits. The PBLCI is an analytical series produced as a by-product of the CPI, with the main conceptual difference being the PBLCI is constructed on an outlays basis, while the CPI is constructed on an acquisitions basis. The PBLCI is published quarterly, approximately seven weeks after the end of the reference period. It is revised only in exceptional circumstances, such as to correct a significant error. As is the case with all ABS price indexes, the reference period (i.e. the period in which the index is set equal to 100.0) will be changed periodically. The index number levels for all periods will be changed by this process and it may also result in differences, due to rounding, between the percentage changes published on the old reference period and those on the new reference period.

    Derived price indexes covering a wide range of economic transactions are produced as part of the National Accounts. Two types of National Accounts based price index are published: chain price indexes and implicit price deflators (IPDs). Both indexes are published for expenditure components and sub components of
    Gross Domestic Product (GDP). The components are: government consumption, household consumption, private capital formation, public capital formation and imports and exports of goods and services. Chain price indexes and IPDs are also published for GDP and other macro-economic aggregates such as Domestic Final Demand. IPDs are also published for Gross National Expenditure. Chain price indexes use the volumes of expenditure in the previous financial year (ending 30 June) as their weights. IPDs are compiled at the same levels as for the chain price indexes but use the volumes of expenditure in the current period for their weights. IPDs have long been used to provide macro-economic measures of price change and are usually used in seasonally adjusted form. Both chain price indexes and IPDs are compiled quarterly and are published roughly two months after the end of the reference period. Unlike the other price indexes listed above, the National Accounts price indexes are often revised, sometimes to a significant extent. In addition, they are re-referenced to a new reference year every year, so the level of the index changes regularly, although the percentage changes for earlier periods are not normally affected by this process, other than for rounding differences. These two characteristics are important considerations if National Accounts price indexes are to be used in contracts.

    General matters to consider when developing indexation clauses using a price index

    Considerable care should be taken when considering and using Indexation Clauses. Appropriate professional advice should be obtained when considering the use of an Indexation Clause or any ABS published price indexes.

    The following are some general matters to consider when considering an ABS published price index in an Indexation Clause. It is not an exhaustive list. These matters are provided subject to the disclaimer outlined above. 

    • Establish the base payment, selling or purchase price subject to indexation. Specify the item subject to indexation as precisely as possible (e.g. rent, wage rate, product, etc.). Provide the effective date (e.g. quarter or year) of this base price, because it is the period from which the base payment, etc. will be indexed. Indicate the relationship between the effective date of the base payment, etc. and the price index being used in the indexation (e.g. a contract coming into effect on 5 January 2013 could have a price indexed using the most recent available quarterly data (in this case, September quarter 2012) as its starting point or by using the 2011-12 financial year as the starting point, depending on the intent of the parties)
    • Select an appropriate index or indexes. The index or indexes selected will affect the price change recorded and should be chosen carefully to best represent the item subject to indexation and the intention of the parties
    • Clearly identify the selected index and cite an appropriate source. The Indexation Clause of a contract should identify the selected index by its complete title and any identifying code. For example, in the case of the CPI, it should be specified whether the index to be used is the All groups CPI, or a selected sub component index of the CPI, and also whether it is the weighted average of the eight capital cities or for a particular city. In the case of PPIs, the broad alternatives that could be specified are stage of production, or product, or industry based indexes. The specific component index being used should be explicitly identified. For WPIs, the broad characteristics that could be specified are national, state or industry group indexes. When considering the HPI, it should be specified whether the index is the preliminary or final index, and also whether it is the weighted average of the eight capital cities or an index for a particular city. With respect to the ALCIs, the index should be identified by household type. Contracting parties should cite specific index series rather than table numbers and/or table titles in their indexation contracts because table numbers and the contents of tables are subject to change
    • State the frequency of price adjustment. The Indexation Clause should specify the frequency at which price adjustments are to be made, such as quarterly, half yearly, annually etc. It may be useful to set out the method to be used in calculating the indexation factor, particularly if the indexation is half-yearly or annually. For example, different results are generally obtained for annual estimates calculated as the change in the latest quarter over the same quarter of the preceding year (e.g. June quarter 2013 over June quarter 2012) compared with those calculated as the average of the latest four quarters over the average of the preceding four quarters (e.g. the average of the four quarters from September quarter 2012 to June quarter 2013 over the average of the four quarters from September quarter 2011 to June quarter 2012). Similar issues apply to half yearly changes
    • Provide for renamed, varied or discontinued price indexes. Occasionally price indexes can be reviewed or restructured, which may result in some component index series being renamed, discontinued or the timing of the publication of the index changed. Sometimes an index is permanently discontinued (for example, when a product declines in market importance). Indexation Clauses should contain a default mechanism for determining an equivalent appropriate index or price adjustment mechanism should this occur
    • Provide for potential revisions to the price index data. The quarterly and annual movements recorded by the ABS price indexes are not often revised (apart from the seasonally adjusted wage price index and trend wage price index, which can be revised as extra terms are added to the end of the series). Generally, situations in which revisions do occur include correcting an error that has arisen in the data first published. It could be useful for parties to set out agreed procedures to deal with the possibility of revisions occurring. For example, an Indexation Clause could state that a price is to be indexed by the percentage change first published in the relevant (indexation) series for each period covered by the contract, or it could be indexed by the latest available data at the point at which the indexation clause takes effect
    • Avoid locking indexes used for Indexation Clauses into any particular reference period. Occasionally the reference period of a price index (i.e. the period in which the index is set equal to 100.0) can be changed. This will result in a change in the index level from that which was previously available. Relative movements of any series over time, however, are not generally affected by a reference period change (except for rounding differences). Indexation Clauses should be drafted so that the parties to them are not adversely affected by a change to the reference period of a price index
    • Define the formulae for the price adjustment calculation. Often the change in payments or price is directly proportional to the percentage change in the selected index between two specified time periods. The following CPI example, which has a reference period of 2010-11 = 100.0, illustrates the computation of percentage change:
      • Index number for the All Groups CPI for Sydney in 2010-11 = 97.6
      • less index number for the corresponding series in 2009-10 = 94.8
      • Change in index points = 2.8
      • Percentage change 2.8 / 94.8 x 100 = 3.0%
    • Allow for negative price movements. Any potential variations from the recorded price movements should be explicitly set out. For example, in some Indexation Clauses, there is no change in the contract price in a period in which there is a fall in the price index being used for indexation. In some cases, there will be a catch up once the index rises again.

    Appendix 2: List of classifications

    Introduction

    The Australian Bureau of Statistics (ABS) uses many international and local classification systems. The availability and nature of the data will also affect the design of a classification system. In the price index context, the availability of value data will dictate the lowest level of detail that might be possible. Although a classification may be conceived according to economic theory or user requirements using a top-down approach, in application the ABS collects data about individual products and then aggregates them according to the classification structure (i.e. a bottom-up approach).

    In application, products used in the compilation of the Australian Producer Price Indexes (PPIs) and International Trade Price Indexes (ITPIs) can be classified according to more than one classification structure.

    Australian and New Zealand Standard Industrial Classification (ANZSIC), 2006

    The Australian and New Zealand Standard Industrial Classification (ANZSIC) was been developed for use in the compilation and analysis of industry statistics in Australia and New Zealand. The Australian Bureau of Statistics and Statistics New Zealand jointly developed this classification to improve the comparability of industry statistics between the two countries and with the rest of the world.

    This 2006 edition of the ANZSIC replaces the 1993 edition, which was the first version produced. Prior to then, Australia and New Zealand developed separate standard industry classifications. ANZSIC 2006 reflects the outcomes of a substantial review of the classification, which included extensive consultation with users of the classification, such as government agencies responsible for policy formulation and administration, and non-government analysts of industry structure and performance. The purpose of the review was to ensure that the classification remained current and relevant, reflecting the changes that have occurred in the structure and composition of industry since the previous edition and recognising changing user requirements for data classified to industry. The conceptual framework underpinning the ANZSIC has been more rigorously and consistently applied in this edition. The publication includes detailed explanations of the classification principles and the treatments of certain types of activities. International comparability has been enhanced by aligning the classification, as far as possible, with the International Standard Industrial Classification of All Economic Activities (ISIC) (Revision 4).

    ANZSIC 2006 (Revision 2.0) is used for three purposes in the production of Australian PPIs and ITPIs. First, in both the output and stage of production price indexes it is used to classify the industry of a producer of a given product (in an industry-of-origin role). Second, for input price indexes, ANZSIC 2006 is used to classify the industry of a purchaser of a given product (in an industry-of-consumption role). Third, for imports, in both the Import Price Index and the Stage of Production PPIs, ANZSIC 2006 is used to identify a domestic competing industry of origin.

    Australian Statistical Geography Standard (ASGS), 2011

    The main purpose of the Australian Statistical Geography Standard (ASGS) is for collecting and disseminating geographically classified statistics, which are statistics with a 'where' dimension. This classification system provides six hierarchies of geographical areas, with each structure designed to suit different statistical purposes. Several Australian PPIs use the top levels of the main structures of the ASGS, in particular the State and Territory level and the Greater Capital City Statistical Area (GCCSA) level. The price index of Input to the House construction industry in particular is restricted in scope to the six state capital cities, as defined within ASGS. This price index measures prices in the capital city in which the products are purchased. The Australian Statistical Geography Standard (ASGS) replaced the previously used Australian Standard Geographical Classification (ASGC) and became the Australian Bureau of Statistics' sole geographical framework effective from July 2011.

    Standard International Trade Classification (SITC, Rev.4), 2008

    Standard International Trade Classification (SITC) is the United Nations recommended trade classification for international statistical purposes. The SITC groups products according to the level of manufacturing that the products have undergone; that is SITC is a degree of transformation classification. The ABS uses the SITC as its primary classification for the publication and dissemination of both broad level international trade statistics and the international trade price indexes. The design (structure) of the import price index is based on SITC.

    Harmonized Commodity Description and Coding System (Harmonized System or HS), 2012

    The HS is a broad classification system used to classify internationally traded products as they enter or leave a country. Product codes can be determined according to their form and function. It was developed by, and is maintained by, the World Customs Organisation (WCO). It has been adopted by most trading nations including Australia, as it enables information on traded products to be compared internationally.

    Harmonized Tariff Item Statistical Code (HTISC), 2012

    All goods imported into Australia since 1 January 1988 have been classified according to the ten-digit HTISC. The first six digits of the code are taken from the Harmonized System (HS), with the seventh and eighth digits added by Customs to allow for different rates of duty applied to particular goods. The ninth and tenth digits (statistical codes) are added by the ABS to satisfy Australian statistical requirements, and, in some instances, the information needs of regulatory or supervisory agencies which are able to access the records from Customs.

    HTISCs provide the most detailed breakdown of imported goods and are used to analyse imports of particular commodities. Customs has responsibility for maintaining the HTISC documentation, and distributes replacement pages containing any recent classification amendments to users.

    The detailed classification can be found in the Combined Australian Customs Tariff Nomenclature and Statistical Classification (1996) (Customs Tariff).

    Australian Harmonised Export Commodity Classification (AHECC), 2012

    The Australian Harmonized Export Commodity Classification (AHECC) is designed for use by exporters, customs brokers and freight forwarders in the classification of goods when providing export declarations to the Australian Customs Service, and to assist users interpret export statistics published by the Australian Bureau of Statistics (ABS).

    The classification is based on the six digit international Harmonized Commodity Description and Coding System (HS) developed by the World Customs Organization (WCO) for describing internationally traded goods. The ABS extends the six digit international HS by two digits to provide a finer level of detail to meet Australian statistical requirements (Statistical codes).

    Input-Output Product Classification (IOPC)

    As the input-output system describes the production and subsequent use of all products, the Input-Output Product Classification (IOPC) needs to be defined in terms of characteristic products of industry sectors. The structure of the IOPC therefore arises from its industry-of-origin basis. In an industry-of-origin classification, each product is shown according to the industry in which it is primarily produced. Thus, the structure of the IOPC consists of industry-of-origin headings with detailed products shown under each heading. The overall principles for the preparation of such an industry-of-origin product classification are: 

    • Homogeneity of inputs - each product or product group should consist of products that have similar input structures or technology of production. This principle is generally applied through the definition of each IOPC item in terms of the ANZSIC industry sector in which it is mainly produced
    • Homogeneity of disposition - each product or product group, having satisfied the first criterion, should consist of products that have similar patterns of disposition or usage. This principle is applied by reference to the description of source data and information about the transport, distribution, and product taxation margins applying to particular products.

    The IOPC plays an important role in both the input and output PPI’s as the basis of classification of all individual products. The IOPC are consistent with ANZSIC 2006 and are identified by an 8 digit code. The first four digits typically refer to the primary ANZSIC class and the last 4 digits to the product number.

    Classification by Broad Economic Categories (BEC)

    This classification system groups products according to their main end use, namely capital goods, intermediate goods, and consumption goods. The Classification by Broad Economic Categories (BEC) was designed as a means for converting data compiled in terms of SITC, into end-use categories. These categories are aligned as far as practicable with the System of National Accounts (SNA) framework. The BEC classification is used for economic analysis of international merchandise trade statistics, and the ITPI, and it facilitates the use of these data in conjunction with other national and international economic statistics.

    Glossary

    Aggregation

    The process of combining lower level data or price indexes to produce higher level data or indexes within a structure.

    Basic Price

    The basic price is the amount receivable by the producer from the purchaser for a unit of a product produced as output, minus any tax payable, plus any per unit subsidy receivable on that unit as a consequence of its production or sale.

    Basket

    A commonly used term for the products (goods and services) priced for the purpose of compiling a price index.

    Bias

    A systematic error in an index. Bias can arise for a number of reasons, including the design of the sample selected, the price measurement procedures followed, or the index number formula employed.

    Chain linking

    Joining together two indices that overlap in one period by rescaling one of them to make its value equal to that of the other in the same period, thus combining them into single time series. Also known as chaining.

    Component

    A level of aggregation of like products in a price index. It can be either a set of specifications linked to a component or a set of components linked to higher level components.

    Elementary aggregate

    The lowest level of product classification in ABS price indexes and the only level for which index numbers are constructed by direct reference to price data.

    Fixed weight index

    A price index in which the weighting pattern is fixed for the life of each index series.

    Goods and Services Tax (GST)

    An ad valorem tax applied to supplies (products produced or delivered) by registered suppliers engaged in taxable activity. The GST is effectively paid only by final consumers. The current legislated rate of GST is 10%.

    Implicit Price Deflator (IPD)

    Within the system of national accounts. An implicit price deflator is obtained by dividing a current price value by its real counterpart (the chain volume measure). When calculated from the major national accounting aggregates such as GDP, IPDs relate to a broader range of products in the economy than that represented by any of the individual price indexes (such as CPI and PPIs).

    Movements in an implicit price deflator reflect both changes in price and changes in the composition of the aggregate for which the deflator is calculated.

    Index points change

    The change in an index number series from one period to another expressed in terms of the difference in the number of index points in each of the index numbers.

    Index points contribution

    A quantitative expression of how much each component contributes to the magnitude of the All Groups index number.

    Index number series

    A series of numbers measuring the change over time from a reference period value, which is normally presented as an index value of 100.0.

    Index reference period

    The period for which the index is set to 100.0. The PPI reference period is currently set to 2011-12. The reference period should not be confused with the weighting period (see Weight reference period below).

    Indexation

    The periodic adjustment of a money value according to changes in a price index.

    Inflation (deflation)

    A term commonly used to refer to changes in price levels. A rise in prices is called inflation, while a fall is called deflation.

    Input-Output table

    A national accounts Input-Output table provides a means of presenting a detailed analysis of the process of production and the use of products and the income generated in the production process.

    Input price index

    Input price indexes measure the average change in the prices of products used in the production process. These products are produced elsewhere in the domestic economy, or are imported.

    Jevons price index

    A price index defined as the unweighted geometric average of the current to reference period price relatives. It is an elementary index.

    Link factor

    A ratio used to join a new index series to an old index series to form a continuous series.

    Link period

    The link period is the period in which the index is calculated on both the old weights and structure and the new weights and structure.

    Linking

    The technique used to join a new index series (e.g. one having a changed composition and/or weighting pattern) to an old index series to form a continuous series. The technique ensures that the resultant linked index reflects only price variations and that introducing the new products and/or weights does not affect the level of the index.

    Matched Sample

    In a matched sample, products that are priced from period to period are identical in all respects.

    Non-market activities

    Activities covering products that producers supply to others for free or at prices that are not economically significant.

    Non-probability sampling

    Non-probability sampling is also known as judgmental or purposive sampling, or expert choice. In a price indexes context this involves index compilers selecting producers and products from which to obtain prices using available information on the relative importance of individual producers and products.

    Output price index

    Output price indexes measure the prices received by producers irrespective of whether their products are sold on the domestic market or as exports.

    Percentage change

    The change in the level of an index series from one period to another expressed as a percentage.

    Price index

    A composite measure of the prices of products expressed relative to a defined reference period.

    Price levels

    Actual money values in a particular period of time.

    Price movements (or price changes)

    Changes in price levels between two or more periods. Movements can be expressed in money values, as price relatives or as percentage changes.

    Price reference period

    The period whose prices are used as denominators in the elementary index calculation. This period can vary from component to component and may be updated when sample maintenance is undertaken.

    Price relative

    The ratio of the price level in one period to the price level in an earlier period.

    Producers' price

    The producers’ price is the amount receivable by the producer from the purchaser for a unit of a product produced as output, including any tax that is incorporated within the sales price and excluding any subsidy that reduces the sales price, on that unit as a consequence of its production or sale.

    Provider

    Businesses, government agencies etc. from which prices data and associated information are collected for use in compiling the PPIs and the ITPIs.

    Purchaser’s price

    The amount paid by the purchaser inclusive of any non-deductible taxes on products, transport and trade margins.

    Quality adjustment

    The elimination of the effect that changes in the quality or composition of a product have on the price of that product in order to isolate the pure price change.

    Quantity weights

    Weights defined in terms of physical quantities, such as the number or total weight of goods or the number of services.

    Regimen level

    The selected generic products of which a sample will be priced for the purpose of compiling a price index.

    Sample

    A representative selection of products to be priced.

    Seasonal products

    Products that are only available, or available in much greater supply, at certain times of the year.

    Spatial price indexes

    Indexes that compare the relative differences in prices between geographic locations at the same point in time.

    Specification

    Detailed description of the characteristics of a product to be priced.

    Splicing

    A technique used to introduce new products or providers into the index calculations so that the level of the index is not affected.

    Superlative index

    A superlative index is one of a small group of indexes that makes use of prices and quantities. Quantities are treated in a symmetric manner in each pair of periods under observation. Examples are the Fisher Index and the Tornqvist Index. Superlative indexes require both price and expenditure/quantity data for all periods.

    Temporal price index

    Index that measures price change over time.

    The New Tax System

    Package of changes to the taxation and social welfare system including the introduction of GST and the changes to business taxation announced in response to the review of business taxation.

    Transaction price

    The price actually paid by a purchaser of a product - as opposed to a list price or quoted price.

    Utility

    Often defined as the satisfaction derived from consumption the of a product.

    Value aggregate

    The current cost in dollars of purchasing (or revenue received from selling) the same quantity of products as was purchased/sold in the weight reference period.

    Value data

    Value data are revenue data for an output index and expenditure data for an input index.

    Weight

    The measure of the relative importance of a product in the index regimen relative to the other products. Weights can be expressed in either quantity or value terms. Value weights are used by the ABS in compiling all official price indexes.

    Weight reference period

    The period to which the fixed quantity weights relate.

    Weighted average

    An average that is obtained by combining prices or price indexes according to the relative importance of each component.

    Abbreviations

    2008 SNASystem of National Accounts, 2008
    ABSAustralian Bureau of Statistics
    ACSAustralian Customs Service
    ADPIAttached Dwellings Price Index
    AHECCAustralian Harmonised Export Commodity Classification
    ALCIAnalytical Living Cost Index
    ANZSICAustralian and New Zealand Standard Industrial Classification
    APRarithmetic mean of price relatives, also referred to as the Carli formula
    ASGSAustralian Statistical Geography Standard
    ASICAustralian Standard Industrial Classification
    ATOAustralian Taxation Office
    BACSBuilding Activity Survey
    BASBusiness Activity Statement
    BECClassification by Broad Economic Categories
    BoPBECBalance of Payments Broad Economic Classifications
    c.i.f.cost, insurance and freight
    CPIConsumer Price Index
    EAelementary aggregate
    EPIexport price index
    EurostatStatistical Office of the European Communities
    f.o.b.free on board
    FBTFringe Benefits Tax
    GCCSAGreater Capital City Statistical Area
    GDPgross domestic product
    GDP(E)expenditure approach to measuring GDP
    GDP(I)income approach to measuring GDP
    GDP(P)production approach to measuring GDP
    GMgeometric mean
    GSTgoods and services tax
    HESHousehold Expenditure Survey
    HPIHouse Price Index
    HSHarmonized Commodity Description and Coding System (Harmonized System)
    I-Oinput-output
    ILOInternational Labour Organization
    IMFInternational Monetary Fund
    IOPCInput-Output Product Classification
    IPDimplicit price deflator
    IPIimport price index
    ISICInternational Standard Industrial Classification
    ITPIInternational Trade Price Index
    NPISHnon-profit institutions serving households
    OECDOrganisation for Economic Co-operation and Development
    PAYGpay-as-you-go tax
    PBLCIPensioner and Beneficiary Living Cost Index
    PPIproducer price index
    RAPrelative of the arithmetic mean of prices, also referred to as the Dutot formula
    RBAReserve Bank of Australia
    RPPIResidential Property Price Index
    SDDSSpecial Data Dissemination Standard
    SITCStandard International Trade Classification
    SLCISelected Living Cost Index
    SNASystem of National Accounts
    SOPStage of Production
    UNECEUnited Nations Economic Commission for Europe
    WCOWorld Customs Organization
    WPIwage price index

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