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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.

The SOP concept

22 The indexes are compiled using the SOP concept. Under this concept flows of commodities are categorised according to their economic destination on a sequential basis along the production chain. The basis for the categorisation is the Australian input-output tables (1996-97). The primary categorisation is between final commodities (i.e. commodities destined for final consumption, capital formation or export) and non-final commodities (i.e. commodities that flow into intermediate consumption for further processing).

23 This initial breakdown of the commodity flows into final and non-final represents a useful economic dissection of producers' transactions. However, the non-final commodities can flow into the production of both final and other non-final commodities. Therefore, to aid analysis, the non-final commodity flows have been divided on a sequential basis between Stage 1 (or preliminary) commodities and Stage 2 (or intermediate) commodities as illustrated below. This approach results in three separate stages of production.

25 Under this framework, preliminary (Stage 1) commodities are used in the production of intermediate (Stage 2) commodities; in turn intermediate (Stage 2) commodities flow into the production of final (Stage 3) commodities.

26 The framework allows for analyses of price change as commodities 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

27 The ABS has adopted a transaction flow approach in disaggregating commodity supply into the various production stages. This approach means that the assignment of a commodity to a stage is based on the proximity of its use in final demand.

28 Alternative degree of fabrication or principal destination approaches are employed by statistical agencies in some other countries. These approaches result in the allocation of particular commodities to one, and only one, stage. This would present particular problems for Australia due to the openness of the economy, with exports (and imports) equivalent to about 20% of gross domestic product. Commodities such as wheat, wool, and iron ore are exported in large volumes as well as being further processed locally. The allocation of such commodities to a single stage would be very arbitrary by necessity.

29 Adopting the transaction flow approach means, for example, that exported wheat and domestically used wheat are treated as different commodities for index construction purposes. Under this approach commodities transactions can be allocated to more than one stage. Exported wheat is treated as a final (Stage 3) commodity while wheat used domestically to make the flour used in bread production is considered to be a preliminary (Stage 1) commodity. Similarly, commodities such as energy and containers appear under all three categories.

Scope and coverage

30 Producer price indexes conventionally relate to the output of domestic industries, at basic prices, either inclusive or exclusive of exports. As the main focus is on domestic inflation, exports are excluded from the headline SOP series 'Final (Stage 3) commodities', as presented in the key figures on the front page and in tables 1-6. Index series for Final (Stage 3) commodities including exports are available in tables 26 & 27 on the ABS web site <www.abs.gov.au>.

31 Imports have also been incorporated within the framework, recognising that they represent an important potential source of inflationary pressure.

32 In concept, the SOP indexes incorporate all flows of goods and services. However, currently there is limited coverage of service industries and the construction industry by the producer price indexes (see sections on construction industry and service industries producer price indexes below).

33 Price indexes for most transport and storage services (division I of ANZSIC) and property and business services (division L of ANZSIC) industries have been included in the SOP framework. However, price series for most Final (Stage 3) consumer services are not currently available on a sufficiently timely basis to allow their inclusion in the indexes. This has the effect of decreasing the relative weight of consumer items versus capital items in the final stage. It is intended to introduce additional services price series as they become available, along with the consequential weight changes.

34 Index coverage for the construction industry (division E of ANZSIC) is currently limited to the output of the following ANZSIC classes:

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

Items and weights

36 The items included in the indexes reflect the values of commodity flows, for both domestic supply and imports, allocated to stages based on an analysis of detailed 1996-97 input-output tables. The index structures and weighting patterns for the SOP indexes are shown in the Appendix of the December 2002 issue of Producer Price Indexes, Australia (cat. no. 6427.0).

Comparisons with the Consumer Price Index

37 Final (Stage 3) indexes are presented for consumer commodities. It should be noted that this index is not directly comparable with the Consumer Price Index (CPI). The two indexes differ significantly in concept and coverage. The major differences are:

• 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.

39 Tables 10 and 11 present the Price Indexes of Articles Produced by Manufacturing Industries and tables 12-14 present the Price Indexes of Materials Used in Manufacturing Industries. Basic prices are used for the output index and purchasers' prices for the input index (see paragraphs 4-8). Therefore, as far as possible, ex-factory prices are included in the output index and delivered into factory prices in the input index.

40 Table 47, which is available on the ABS web site, presents Price Indexes of Copper Materials used in the manufacture of electrical equipment.

41 All of the manufacturing indexes are calculated on the reference base 1989-90=100.0.

Scope

42 The manufacturing indexes are constructed on a net sector basis with intra-sector transactions netted out. The scope of the output index is therefore restricted to transactions in articles produced by the defined sector of Australian manufacturing industry that are sold or transferred to domestic establishments outside that sector, or used as capital equipment, or exported. The scope of the input index relates to transactions in materials used in the defined sector of Australian manufacturing industry that are produced by domestic establishments outside that sector or imported.

Classification

43 The manufacturing division output index (table 10) measures changes in prices of articles produced by establishments classified to ANZSIC division C, Manufacturing, that are sold or transferred to domestic establishments outside the manufacturing division for intermediate use, or used as capital equipment, or exported. It excludes intermediate transactions in articles produced by establishments within the manufacturing division and sold or transferred to other establishments within the manufacturing division for further processing.

44 Similarly, the manufacturing division input index (tables 12 and 13) measures changes in prices of materials used by establishments classified to ANZSIC division C, Manufacturing, that have been purchased or transferred in from domestic establishments outside the manufacturing division or imported. It excludes intermediate transactions in materials produced by establishments within the manufacturing division and sold or transferred to other establishments within the manufacturing division for further processing.

45 An advantage of the net sector approach over the alternative gross sector approach (under which the intra-sector transactions would be in-scope) is that it avoids the potential distorting effects that may result from multiple counting of changes in transaction prices as commodities flow through different production processes.

46 On the other hand, although conceptually valid, the exclusion of the internal intermediate transactions from the net sector manufacturing division indexes results in incomplete coverage of the targeted sector of the economy. In order to increase coverage, while still avoiding the multiple counting issue, independent net sector measures have been constructed for ANZSIC manufacturing subdivisions and groups. While having intermediate transactions between different manufacturers within a given subdivision or group netted out, intermediate transactions with manufacturers in other subdivisions/groups are in-scope.

47 The output indexes for ANZSIC subdivisions and groups (table 11) measure changes in prices of articles produced by establishments classified to each defined ANZSIC manufacturing sector which are sold or transferred to establishments outside that sector. These exclude intermediate transactions in articles produced by establishments within the specific sector and sold or transferred to other establishments in the same sector for further processing.

48 Similarly, the input indexes for ANZSIC subdivisions and groups (table 14) measure changes in prices of materials used by establishments classified to each defined ANZSIC manufacturing sector which are purchased or transferred in from establishments outside that sector. These exclude intermediate transactions in materials produced by establishments within the specific sector and sold or transferred to other establishments in the same sector for further processing.

49 It is important to note that the manufacturing division output and input indexes, and the corresponding subdivision/group indexes, are independent constructs. As such, a division index cannot be derived by simply weighting together the separate subdivision and group indexes as the latter net sector indexes are not a straightforward decomposition of the broader net sector index.

Items and weights

50 The items included in the manufacturing indexes reflect the values of articles produced and materials used based on an analysis of detailed input-output tables; 1993-94 for the output indexes and 1989-90 for the input indexes.

51 The index structures and weighting patterns are shown in Appendix A of the September quarter 2000 issue of the former publication Price Indexes of Articles Produced by Manufacturing Industry, Australia (cat. no. 6412.0), and Appendix A of the July 1996 issue of the former publication Price Indexes of Materials Used in Manufacturing Industries, Australia (cat. no. 6411.0).

CONSTRUCTION INDUSTRY PRODUCER PRICE INDEXES

Introduction

52 The construction industry producer price indexes relate to the outputs (e.g. buildings) and the inputs (i.e. materials used) of establishments classified to designated sectors of the Australian construction industry. They are important sources of data for the SOP index.

53 Table 15 presents the Price Index of the Output of the General Construction Industry, and Table 16 presents price indexes of the outputs of the constituent industries of this ANZSIC subdivision. Tables 17 and 18 present the Price Index of Materials Used in House Building and tables 19 and 20 present the Price Index of Materials Used in Building Other than House Building. The pricing basis is basic prices for the output indexes and purchasers' prices for the input indexes (see paragraphs 4-8 above). Therefore, as far as possible, builders' selling prices are reflected in the output index and delivered on site prices in the input indexes.

54 The output indexes are calculated on the reference base 1998-99=100.0 and the input indexes on the reference base 1989-90=100.0.

Scope

55 The Price Index of the Output of the General Construction Industry (table 15) measures changes in prices of the output of ANZSIC subdivision 41 - general construction. The price indexes in table 16 measure changes in the price of the output of constituent groups and classes of this subdivision. These groups and classes are: the building construction group (411), which consists of the classes house construction (4111), residential building construction n.e.c. (4112) and non-residential building construction (4113); and the non-building construction group (412), with the class of road and bridge construction (4121). Road and bridge construction is the sole contributor to the index for non-building construction until coverage can be extended to include the class of non-building construction n.e.c. (4122), which consists of railways, telecommunications, electricity infrastructure, etc.

56 The first input index measures changes in prices of materials used in house building, where a house is defined as a detached building predominantly used for long-term residential purposes and consisting of only one dwelling unit. ANZSIC class 4111 (house construction) approximates the industry scope of the index.

57 The second input index measures changes in prices of materials used in other forms of building with a scope approximating ANZSIC class 4112 (residential building construction n.e.c.) and class 4113 (non-residential building construction), together.

58 Neither of the input indexes explicitly cover alterations, additions, renovations and repairs. They each relate to the statistical division for each State capital city.

Items and weights

59 The items included in the output indexes are chosen on the basis of work done, categorised by building function or type of construction and State of activity, as recorded in the ABS Construction Activity statistics for the five years ending 1998-99.

60 The items and weights for the house building input index were derived from reported values of each material used in selected representative houses in the three years ending 1992-93, with individual weighting patterns for each State capital city reflecting the differences in the relative usage of different materials. For the other than house building index, the items were selected and allocated weights in accordance with estimated values of materials used in the construction of buildings other than houses completed in each of the capital cities in the five years ended June 1992. This same weighting pattern is used for each of the six State capital cities.

61 The weighting patterns are set out in Appendix A of the December 1995 issue of the former publication Price Index of Materials Used in House Building, Six State Capital Cities (cat. no. 6408.0), and Appendix A of the October 1993 issue of the former publication Price Index of Materials Used in Building Other than House Building, Six State Capital Cities (cat. no. 6407.0).

MINING INDUSTRY PRODUCER PRICE INDEXES

62 Table 21 presents Price Indexes of Materials Used in Coal Mining. The pricing basis of the index is purchasers' prices (see paragraphs 4-8) and, as far as possible, the prices included in the index for items are delivered to the mine site or to the primary storage area for a group of mines.

63 The items included in the indexes reflect the value of materials used in the operation of open cut and underground coal mines in Australia during 1999-2000. The index structures and weighting patterns are available on request.

64 The indexes are calculated on the reference base 1989-90=100.0.

SERVICE INDUSTRIES PRODUCER PRICE INDEXES

Introduction

65 Tables 22-25 present producer price indexes for the output of the transport (freight) & storage division, and the property & business services division of the ANZSIC. Included are index numbers for each of the divisions and subdivisions. Transport indexes presented cover freight and services to transport activities only, i.e. passenger transport is excluded. The pricing basis of the indexes is basic prices (see paragraphs 4-8), and so the prices used in the index relate to the amount received by the service provider. The indexes are important sources of data for the SOP indexes. The index numbers are calculated on the reference base 1998-99=100.0.

66 These indexes represent the results to date of a program to progressively extend the scope of the producer price indexes into the service sectors of the economy. First results from the program were published in March 1999, by way of experimental indexes, in the ABS Information Paper: Producer Price Index Developments (cat. no. 6422.0).

Scope

67 The transport (freight) & storage division and property & business services division indexes measure changes in prices of services provided by establishments classified respectively to ANZSIC division I, transport (freight) & storage and ANZSIC division L, property & business services. Index numbers for these divisions are provided in tables 22 and 24 respectively.

68 Tables 23 and 25 contain index numbers for the subdivisions of ANZSIC division I, transport (freight) & storage, and the subdivisions and groups of ANZSIC division L, property & business services, respectively . Indexes at the ANZSIC group and class level for division I, and the ANZSIC class level for division L, are also available on the ABS web site <https://www.abs.gov.au> under catalogue 6427.0, in tables 45 and 46 respectively. Note that some ANZSIC classes within these divisions do not yet have established indexes, and thus are not represented within these tables.

Items and weights

69 ANZSIC class indexes are aggregated to the relevant group, subdivision and division using weights derived from 1996-97 input-output domestic production values, in combination with data from other ABS surveys and industry sources. Where ANZSIC class indexes have not yet been developed, their weight is spread proportionately across the relevant group, subdivision or group of subdivisions dependent on an assessment of what is most appropriate given the activities of the particular class.

Price measurement

70 The development of these new price collections has involved a wide range of diverse industries with different measurement problems. Accordingly, extensive consultation with industry associations and individual businesses has been undertaken to determine the most viable approach, on a case-by-case basis.

71 Characteristics found within the services sector of the economy have complicated the task of price measurement.

72 The tendency within many industries to provide unique, one-off services tailored to the needs of individual customers has posed difficulties in establishing continuity of pricing to constant quality.

73 The 'bundling' of a range of different component services within the one transaction or contract has required investigation of the feasibility of 'unbundling', that is, obtaining separate prices for each of the components of the total service. Where this has not proven to be feasible, the whole service bundle has been priced in total.

74 Respondent businesses are asked to report details of any discounts they offer so that actual transactions prices can be calculated. However, as discounts are sometimes negotiated between individual buyers and sellers in relation to particular transactions, identifying discounts has not always been straightforward.

75 The deregulation of some service industries leads to structural changes and more complex pricing practices. To deal with this, samples are continually updated to incorporate new businesses and pricing methodologies are reviewed over time.

Future developments

76 It is planned to make available indexes for the majority of remaining ANZSIC classes within the transport (freight) & storage division and property & business services division after they have been developed from experimental to production status. At such time these new indexes would contribute to the broader group, subdivision and division indexes presented in this publication. Those ANZSIC classes for which development of a price index is not considered feasible will continue to have their weight distributed for aggregation purposes as described in paragraph 69. Work has also commenced on developing indexes for other divisions of the ANZSIC.

INDEX NUMBERS

77 Index numbers for financial years are simple averages of the relevant quarterly index numbers.

78 Indexes for the Price Index of Materials Used in House Building and the Price Index of Materials Used in Building Other than House Building are presented separately for each of the six State capital cities. These city indexes measure price movements over time for each city. They do not measure differences in price levels between cities.

ANALYSIS OF INDEX CHANGES

79 Care should be exercised when interpreting quarter-to-quarter movements in the indexes as short-term movements do not necessarily indicate changes in trend.

80 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:

81 Stage of Production: Final commodities index numbes -

83 Tables 8 and 9 analyse the contributions to the intermediate and preliminary commodities index numbers, respectively.

84 Similar contribution tables are available on request for most of the industry sector indexes (see paragraph 88 below).

FURTHER INFORMATION

85 Further information on recent price index developments in the ABS is presented in the following publications:

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

ABS DATA AVAILABLE ON REQUEST

88 As well as the statistics included in this and related publications, the ABS has available other price index series (many at a detailed commodity level). Inquiries should be made to Steve Whennan 02 6252 6251.