CHAPTER 3 – COVERAGE OF THE PRODUCER AND INTERNATIONAL TRADE PRICE INDEXES AND MEETING STAKEHOLDER REQUIREMENTS


BACKGROUND

3.1 As discussed in Chapter 2, the principal purpose of the Producer Price Indexes (PPIs) and International Trade Price Indexes (ITPIs) is to support Australian National Accounts (ANA) and Balance of Payments (BOP) compilation. In theory, PPIs and ITPIs should cover all products as presented within the national and international accounts. However, in practice the product indexes represent a subset of production unit transactions (they represent primary products, not all products). There is also a broader coverage of goods than services within the PPIs and ITPIs.

3.2 The relationship between price measures and ANA and BOP requirements can be illustrated by reference to the Australian National Accounts Input-Output (I-O) tables. An I-O table has products and primary inputs in its rows, classified using the Input-Output Product Classification (IOPC), and has industries and final demand in its columns, classified using the Input–Output Industry Group (IOIG) classification. It shows the flow of products and the link from production to final demand.

3.3 The ANA require price indexes (for deflation purposes) for each IOPC within the I-O framework. IOPCs concord to the Australian and New Zealand Industrial Classification 2006 (ANZSIC06), the industrial classification on which the PPIs and ITPIs are arranged. For more information on the IOPC and IOIG classifications see: Australian National Accounts: Input-Output Tables - Electronic Publication, Final release 2006–07 tables (cat. no. 5209.0.55.001).


CURRENT COVERAGE OF THE PPIs AND ITPIs

3.4 Tables 1 and 2 below (and Table 4 in Chapter 4) illustrate the I-O framework and the interrelationships between the various price measures. The I-O tables are presented on the two valuation bases, basic and purchasers’ prices to allow for the presentation of both input and output indexes.

3.5 All current PPIs and ITPIs are categorised under one of the following broad headings:

• Manufacturing industries producer price indexes
• Construction industries producer price indexes
• Copper materials price index
• Mining industries producer price indexes
• Services industries producer price indexes
• International trade price indexes
• Stage of Production

3.6 The presentation of Tables 1, 2 and 4 highlights coverage gaps (of the current PPIs and ITPIs) as the unshaded regions within the table, and is useful for determining priorities for the expansion of price measures to meet ANA and BOP compilation needs (i.e. requirements for ANA and BOP currently fulfilled by ANA Implicit Price Deflators – IPDs and chain price indexes).

Table 1: Input–Output table, purchasers' prices – Current PPI coverage



Table 2: Input–Output table, basic prices – Current PPI and ITPI coverage



COVERAGE EXPANSION

3.7 Australia is a signatory of the Special Data Dissemination Standard (SDDS), an initiative of the International Monetary Fund (IMF). The IMF's Report on Observance of Standards and Codes (ROSC) for Australia 2010, recommended the following:

• Examine the costs and benefits of producing the outstanding PPIs for services, taking into account the added value from the gain in coverage, the methodological and data issues that would arise from developing PPIs for each service industry, and user needs.
• Review the compilation of deflators in the national accounts. This review should cover both conceptual issues and issues of practical measurement. The aim would be to make better use of the data collected by [the ABS] Prices Branch.

WORK UNDERWAY

3.8 In recognition of the IMF ROSC outcomes and a general ABS strategy for coverage improvement, the ABS is developing a program to progressively extend the scope of the PPIs into the service and other harder to measure products of the economy. The main objective of this development program is to compile additional price index series for:

• Assistance in improving the quality of the ANA and BOP by providing a wider range of price indexes to be used as deflators when deriving volume measures of economic growth; and
• Contribution to the development of new measures of inflation. This is currently compiled under the Stage of Production (SOP) framework (see Chapter 4), conceptually a whole of economy measure.

3.9 The limited coverage of services by PPIs is not unique to Australia and the ABS acknowledges that the PPIs and ITPIs produced by the ABS cover a broader range of goods than services. To increase services coverage there are two dedicated projects underway.

3.10 The first was the reinstatement in 2009 to the ABS work program of an experimental index measuring price change for the distribution service provided by retailers (ie Retail trade margins). The second is the services producer prices index (SPPI) extension program, for which the ABS received additional ongoing Government funding in the May 2011 Federal Budget.

3.11 The scope of these programs will be based on ANZSIC06 (and the IOPC which concords to it) and when selecting products, priorities will be set according to the requirements of the ANA and BOP.

3.12 The work on services price measurement is being conducted as part of the PPI and ITPI review and will progressively work through a prioritised list which includes compiling price indexes for:

• Retail trade margins
• Construction products
• Information Media and Telecommunication products
• Transport, Postal and Warehousing products; and
• International Trade in Services

3.13 There are significant conceptual and practical issues with measuring prices for services products. Consultation with industry associations and individual businesses will be required. There may be some elapsed time between commencement of research and the publication of new price index time series.

Presentation of the PPIs and ITPIs – Whole of economy Input-Output organising structure

3.14 As the coverage of PPIs and ITPIs are gradually expanded (the grey shaded areas in Table 3 below represent the maximum extent of PPI and ITPI expansion), there is an opportunity to reassess the presentation of the current (and future) series.

3.15 A simple organising framework could present the input and output product indexes by industry, providing inflation measures for all products consumed by business (input), and all products available for use by an economy (output), respectively. These input and output indexes are illustrated in Table 3 below as the black shaded area. This structure is currently used by Statistics New Zealand for the organisation of PPIs, where the output and input indexes correspond to the System of National Accounts (SNA) definitions of gross output and intermediate use for all industries (including services).
Table 3: Representation of a whole of economy Input-Output organising structure

3.16 There are some practical barriers to achieving this aim. A prohibitively large sample increase is required, as illustrated by comparing the gaps shown in the current price series coverage (i.e. the blank space) in Tables 1 and 2 with Table 3 above.

3.17 Price index series, however, may not need to be constructed for every ANA and BOP deflation need and the PPI/ITPI scope would increase as per the strategy and priorities to be outlined in the outcome of this review. It should be noted that the presentation of the ITPIs will not be changed by decisions relating to the presentation of the PPIs.

ABS POSITION

3.18 The ABS will expand the coverage of the PPIs and ITPIs and progressively collect sufficient data to support the principal purpose, under the current or any alternative organising structure as discussed above and in Chapter 4 – The organising structure for the PPIs and ITPIs.

3.19 The ABS will evaluate the I-O organising structure, the implementation of which may result in the current individual index presentations, such as APMI and MUMI, being altered at an aggregate level. The ABS will evaluate the need for an aggregate hierarchy of published indexes within this structure. For example, if all subdivision indexes are published, whether there is a need for the presentation of aggregated division indexes.


USER COMMENTS

3.20 Users are invited to comment:

• From the perspective of improving the ANA and BOP, whether users agree with the named coverage expansion priorities for the PPIs and ITPIs;
• On whether there are additional areas of priority for PPI and ITPI coverage and/or quality improvement; and
• On whether there is a need for additional index structures (eg. Division PPIs) within the proposed I-O organising structure.