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. 

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:

• Information Paper: Outcome of the Review of the Producer and International Trade Price Indexes, 2012
• Information Paper: Implementation of the Review of the Producer and International Trade Price Indexes, 2012.
   

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.

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.

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.