• Summary
• Downloads
• Explanatory Notes
• Related Information
• Past Releases

EXPLANATORY NOTES

INTRODUCTION

1 This publication contains a range of producer price indexes. Economy-wide indexes are presented within a stage of production framework, followed by a set of indexes relating to specific industries (selected manufacturing, construction, mining and service industries).

2 Index numbers for the recently established producer price indexes, i.e. stage of production and the service industry and construction industry output indexes, are calculated on the reference base 1998-99=100.0. The index numbers for the other, longer established producer price indexes are calculated on the reference base 1989-90=100.0.

GENERAL

Output and input indexes

3 Producer price indexes can be constructed as either output measures or input measures. Output indexes measure changes in the prices of sales by a defined sector of the economy while input indexes measure changes in the prices of purchases by a particular economic sector.

Valuation basis

4 The valuation basis for the transactions covered by an output index is basic prices, defined as the amount received by the producer exclusive of any taxes on products and transport and trade margins (i.e. the pricing point is ex-factory, ex-farm, ex-service provider, etc.).

5 On the other hand, an input index has a valuation basis of purchasers' prices, defined as the amount paid by the purchaser inclusive of any non-deductible taxes on products and transport and trade margins (i.e. the prices recorded in the index should be those relating to delivered into store, delivered on site, etc.).

6 In reality, industry practice may mean that it is sometimes necessary to diverge from the conceptual ideal in order to obtain actual transaction prices. For example, although the pricing point for the output index Price Indexes of Articles Produced by Manufacturing Industries is ex-factory, in cases where costs such as handling and distribution are built into the manufacturer's selling price, they will be included in the index.

7 Similarly, for input indexes such as the Price Index of Materials Used In House Building, which has a pricing point of delivered on site, it has sometimes been necessary to use the nearest actual transaction price available, e.g. prices of materials supplied and fixed.

8 The GST is excluded from all the prices recorded in the current producer price indexes because, in the main, it is deductible on business-to-business transactions. In the case of future service industry output indexes relating to business-to-household transactions, the GST will also be excluded because the pricing basis will be basic prices (i.e. exclusive of product taxes).

Items and weights

9 The indexes are fixed weighted indexes of the Laspeyres form. The list of items and the weights are updated periodically to ensure they remain representative. New index series compiled using updated weights are linked to the previous series to maintain a continuous series. Broad level weights are derived from an analysis of the latest available input-output tables as well as other ABS and industry sources.

10 Where prices of items are expected to move in a similar way, many of the directly priced items carry not only their own weight but also the weight of similar commodities.

Price measurement

11 The main sources of ongoing price data are samples of businesses. The samples can relate to either buyers or sellers, or a combination of both. The choice is influenced by the pricing point of the index (output or input) and practical considerations such as the relative degree of concentration of buyers, and of sellers, and the implications for sample sizes and costs.

12 The main pricing methodology used is specification pricing, under which a manageable sample of precisely specified products is selected, in consultation with each reporting business, for repeat pricing. In specifying the products, care is taken to ensure that they are fully defined in terms of all the characteristics which influence their transaction prices. As such, all the relevant technical characteristics need to be described (e.g. make, model, features) along with the unit of sale, type of packaging, conditions of sale (e.g. delivered, payment within 30 days), etc.

13 When the quality or the specifications of an item being priced change over time, adjustments are made to the reported prices so that the index captures only pure price change. That is, any element of price change attributable to a change in quality is removed. If there is an increase (decrease) in the quality of an item, then the price is adjusted downwards (upwards) to reflect the 'worth' of the quality change. This technique is known as pricing to constant quality.

14 Another very important consideration in establishing and maintaining price collections is to ensure that the prices reported are actual market transaction prices. That is, they must reflect the net prices received (or paid) after taking into account all discounts applied to the transactions whether they be volume discounts, settlement discounts or competitive price cutting discounts which are likely to fluctuate with market conditions.

15 Any rebates also need to be considered. The collection of nominal list prices, or book prices, is unlikely to yield reliable price indexes and could result in quite misleading results if fluctuations in transaction prices are not captured. The ABS therefore asks respondent businesses to report details of the discounts they offer so that actual transaction prices can be calculated. In addition, as many different types of discounts apply to business-to-business transactions (see paragraph 14), considerable effort is put into monitoring discount practices in order to identify changes to existing discounts and the introduction of new ones.

16 Specification pricing is not feasible in cases where the products are unique and not reproduced over time, e.g. construction industry output and many of the customised business services. As a result alternative pricing techniques need to be used, often involving compromise. Some of the approaches adopted include the use of model pricing, collecting unit values for reasonably homogeneous components of a good or service, input pricing and collecting charge-out rates (e.g. for a legal service).

Classifications

17 As far as possible the industry sector indexes have been constructed in accordance with the Australian and New Zealand Standard Industrial Classification (ANZSIC). The Stage of Production 'contribution to change' tables (tables 5-9) are also presented in terms of the ANZSIC.

STAGE OF PRODUCTION (SOP) PRODUCER PRICE INDEXES

Introduction

18 Tables 1-9 present producer price indexes for the supply of commodities to the Australian economy in a stage of production (SOP) framework. As such, the indexes cover both domestically produced and imported commodities, individually and in aggregate. The SOP indexes are compiled from data used in the industry sector indexes, the international trade indexes and some additional data collections. The indexes are calculated on the reference base 1998-99=100.0.

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

20 A more detailed explanation of the SOP concept is contained in the ABS Information Paper: Producer Price Index Developments (cat. no. 6422.0), released on 25 March 1999. The index numbers in this current publication cannot be directly compared with the experimental index numbers in the information paper because:

• the coverage of the series has been expanded to include selected service and construction industries; and
• the weighting patterns of the indexes have been updated to 1996-97 and the reference base of the indexes has been updated to 1998-99=100.0.

• 4111 House construction;
• 4112 Residential building construction n.e.c.;
• 4113 Non-residential building construction; and
• 4121 Road and bridge construction.

• the pricing basis for the Final (Stage 3) SOP consumer index is basic prices (see paragraph 21). The CPI, however, measures changes in purchasers' prices, i.e. the actual retail prices paid by households for products, inclusive of non-deductible taxes on products, such as the GST, and any transport and trade margins;
• the coverage of the two indexes differs. Currently the Final (Stage 3) SOP consumer index mainly measures changes in the prices of goods, i.e. most household services are currently excluded from the index (see paragraph 33). The CPI covers both goods and services;
• the indexes have different weighting bases. The weighting pattern for the Final (Stage 3) SOP consumer index is based on the 1996-97 input-output tables, while the CPI weighting pattern is based on the 1998-99 Household Expenditure Survey.

79 Movements in indexes from one period to another can be expressed either as changes in 'index points' or as percentage changes. The following example illustrates the method of calculating index points changes and percentage changes between any two periods:

80 Stage of Production: Final commodities index numbes -

December quarter 2005 119.7 (see table 1)
less December quarter 2004 116.2 (see table 1)
Change in index points 3.5
Percentage change 3.5/116.2 X 100 = 3.0

An Analytical Framework for Price Indexes in Australia, cat. no. 6421.0
Producer Price Index Developments, cat. no. 6422.0
Review of the Import Price Index and Export Price Index, Australia, cat. no. 6424.0
Price Indexes and The New Tax System, cat. no. 6425.0

International Trade Price Indexes, Australia, cat. no. 6457.0
Consumer Price Index, Australia, cat. no. 6401.0
Labour Price Index, Australia, cat. no. 6345.0
Australian National Accounts, Input-Output Tables, cat. no. 5209.0
Balance of Payments and International Investment Position, Australia, cat.no.5302.0