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US Services Producer Price Indices. Roslyn Swick Bureau of Labor Statistics.

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us services producer price indices

US Services Producer Price Indices

Roslyn Swick

Bureau of Labor Statistics

This presentation has been prepared for the Third International Conference on Establishment Surveys: Survey Methods for Businesses, Farms, and Institutions, June 2007. It represents work in progress and does not represent any agency's final positions on issues addressed.

topics
Topics
  • Background of the SPPI
  • Industry-specific methodologies
background of the sppi
Background of the SPPI
  • Defining the SPPI
  • Historical Perspective
  • General PPI Principles
  • Developing Service Indices
  • Keeping Indices Up to Date
defining the sppi
Defining the SPPI

The mission of the PPI program is to measure

average change in output prices received by

domestic producers of goods and services.

The PPI universe includes output from all industries

providing US domestic marketed goods and

services.

Excluded from the universe are output generating

activities with no observable prices such as Social

Assistance and Funds and Trusts.

historical perspective
Historical Perspective

Development of price indices with conceptually

“easy” to define output

Industry Publication date

Line-haul railroads 1985

Deep sea freight transportation 1988

Scheduled passenger air transportation 1990

General freight trucking, long distance 1992

historical perspective6
Historical Perspective

Development of price indices with conceptually

“complex” definitions of output

Industry Publication date

Hospitals 1992

Professional services 1995

Real estate 1996

Insurance 1998

Prepackaged software 1998

Retail trade 2000

historical perspective7
Historical Perspective

Development of price indices with conceptually

“very complex” definitions of output

Industry Publication date

Banking 2004

Wholesale trade 2004

ISPs and web search portals 2004

historical perspective8
Historical Perspective

New service price indices to be introduced in

July 2007:

Industry

Computer Training

Commercial and Industrial Machinery and Equipment Maintenance and Repair

SPPI will then cover approximately 77.4% of

in-scope service industries based on 1992 GDP.

general sppi principles
General SPPI Principles

As with traditional manufacturing pricing,

service PPIs measure the net return to the

service establishment for providing a

specified service to a specified buyer under

specified terms for a specified time.

A detailed description of the selected

service is required in order to accurately

price that service over time.

general sppi principles10
General SPPI Principles

In some service industries, adjustments or

updates have to made to the service items

over time in order to maintain continuous

pricing of the same constant quality service.

In some cases, the company respondents

are able to update the service descriptions.

In other cases, a secondary source is used.

general sppi principles11
General SPPI Principles

For the private passenger auto insurance

index, an actual policy for a specific auto and

driver is priced.

The age of the auto is held constant by

updating the model year on an annual basis.

For example, a 2000 Honda Civic would be

updated to a 2001 Honda Civic.

general sppi principles12
General SPPI Principles

Changing the model year can also move the

auto into a different risk category.

The Insurance Services Office (ISO) assigns

a value to this risk change.

This valuation is used to explicitly quality

adjust the premium so that the change in

risk is not reflected in the index.

developing service indices
Developing Service Indices

A comprehensive definition of the industry

output must be developed.

Primary output is the ultimate service

provided by an industry.

developing service indices14
Developing Service Indices

For the some industries, such as broadcasting, the

output is not as clearly defined.

Stations produce a broadcast signal that is delivered

free of charge to the viewers and listeners.

However, what is actually bought and sold in these

industries is access to an audience through the

broadcast signal.

This access is sold to advertisers through the sale of

airtime.

developing service indices15
Developing Service Indices

A pricing methodology must be developed

that accurately measures the price change

over time for the defined output.

Identify the service characteristics of the

industry.

Analyze the services provided to determine

how to maintain constant quality.

developing service indices16
Developing Service Indices

If you cannot find a pricing methodology

that accurately measures the defined

output, you might not have the right output

definition.

keeping indices up to date
Keeping Indices Up to Date

A constant challenge that occurs in both services

and manufacturing PPIs is keeping the indices up

to date.

PPI is a modified Laspeyres index based on the

fixed input output price index concept, or FIOPI.

While adhering to the FIOPI model is conceptually

correct, there is a danger that the services will no

longer represent current market conditions.

keeping indices up to date18
Keeping Indices Up to Date

Quality adjustment is used for keeping index

data up to date:

  • Explicit quality adjustment
  • Hedonic modeling
  • Other alternatives
keeping indices up to date19
Keeping Indices Up to Date

In order to ensure that the indices are

representative, several strategies have

been developed to reduce or eliminate new

item bias.

New item bias can occur in industries where

there is rapid service or product

development that cannot be captured by

the usual resampling process.

keeping indices up to date20
Keeping Indices Up to Date

Methods used to ensure that there is no new

item bias include:

  • Directed substitution

Used when the new items or new services are provided or

produced by currently sampled establishments

  • Sample augmentation

Used when there are industries with rapid changes in

services being provided

industry specific methodologies
Industry-Specific Methodologies
  • Banking
  • Lessors of nonresidential buildings
  • Hospitals
  • Retail trade
  • Internet service providers
  • Professional Services
  • Employment Agencies
  • Passenger air transportation
banking
Banking

Primary Output

Provision of financial services including

financial intermediation.

For this industry, financial intermediation

can be defined as the assumption of risk

that arises from taking money from

depositors and lending it to borrowers.

banking23
Banking

FISIM

One of the primary challenges in this

industry is to measure financial

intermediation services indirectly measured

or FISIM.

Banks often provide services for which they

do not explicitly charge by paying or

charging different rates of interest to

lenders and borrowers.

banking24
Banking

User Cost

The user cost methodology is implemented

in the PPI.

The user cost for a financial service is the

difference between its revenue and the sum

of its implicit and explicit costs.

banking25
Banking

Reference Rate

To measure these implicit costs, interest is

allocated between loans and deposits by

means of a “reference rate.”

Reference rate is the opportunity cost rate

of money from which the risk premium is

eliminated to the greatest extent possible and

which does not include any intermediation

Services.

banking26
Banking

Pricing Formula

Loans . . .

Interest received + service charges - reference rate

Deposits . . .

Reference rate - (interest paid - service charges)

lessors of nonresidential buildings
Lessors of Nonresidential Buildings

Primary Output

Provision of physical space and management

of the property.

lessors of nonresidential buildings28
Lessors of Nonresidential Buildings

Average Gross Rent

Average gross rent per occupied (rented)

square foot eliminates the measurement of

revenue caused solely by occupancy

changes.

lessors of nonresidential buildings29
Lessors of Nonresidential Buildings

Pricing Characteristics

  • Location
  • Quality of property
  • Management intensity
  • Number of anchors (retail)
  • Level of sales (retail)
  • Percentage of available seats (auditorium)
  • Number of berths (pier/dock)
  • Cargo throughput (pier/dock)
hospitals
Hospitals

Primary Output

Total treatment package that patients

receive during their entire length of stay

(admission to discharge).

hospitals31
Hospitals

Reimbursements

Total reimbursement for the entire stay or

the interim billing period, whichever is

shorter, is collected to measure the output

of this industry.

hospitals32
Hospitals

Pricing Characteristics

  • Diagnosis Related Group

(pre-selected for each sample unit)

  • Principal diagnosis
  • Principal procedure
  • Type of payer
  • Length of stay
retail trade
Retail Trade

Primary Output

Provision of the marketing functions necessary

to allow consumers access to purchase various

goods.

retail trade34
Retail Trade

Margin Price

Preferred price is an average margin for a

relatively homogeneous grouping of

products.

Margin for a unique product is an

acceptable fallback method.

retail trade35
Retail Trade

Pricing Characteristics

Product . . .

  • Type of product
  • Size/weight
  • Material composition

Store . . .

  • Store area
  • Number of available choices of product
  • Existence of scanners
  • Hours of operation
internet service providers
Internet Service Providers

Primary Output

Provision of Internet access to a group of

subscribers.

Subscribers may be residential households,

business or institutional facilities, or other

Internet access providers.

internet service providers37
Internet Service Providers

Average Price per Line

Total revenue earned from all customers

on a specific billing cycle for a specific

form of access within a specific period of

time is divided by the number of lines (or

connections for dial-up and DSL).

internet service providers38
Internet Service Providers

Pricing Characteristics

  • Connection speed
  • Data transfer capacity
  • Bandwidth
  • Services included(e.g. instant messaging, email)
professional services
Professional Services

Primary Output

Provision of services by professionals with

specialized knowledge and the experience

necessary to apply this knowledge.

These professionals include lawyers,

accountants, engineers, and architects.

professional services40
Professional Services

Pricing

Most of the services provided in these

industries are based on unique, non-recurring

transactions.

Such industries require a specific contract to

be collected and set as a baseline transaction.

professional services41
Professional Services

Two options for pricing:

  • Prices based on working time
  • Model prices
professional services42
Professional Services

Price Based on Working Time - Example

Type of service: Auditing. Time required for service completion: 290 hours. Client information: Repeat customer; commercial business. Length of billing period: Single bill for entire service. Services included in engagement:

Service rendered Rate Hours Total fee

Partner $375 10 $ 3,750

Manager $300 40 $12,000

Senior accountant $220 60 $13,200

Associates $125 180 $22,500

Total for services rendered: $51,450

professional services43
Professional Services

Model Price - Example

Type of Service: Building related engineering services. Contract identifier:

Project BLS-PPI. Billing invoice number: 123. CLIENT #456. Multi-use

building. Non-fixed (variable-hourly fee). Qualifications based selection.

Monthly billing. Review soils @ excavation base; test engineered fill, backfill,

observe concrete reinforcement & masonry construction for compliance;

provide proofroll of parking areas; sample & test fresh concrete &

compressive strength; masonry grout & prism testing.

employment agencies
Employment Agencies

Primary Output

Employment agencies are essentially

engaged in the business of connecting

employers and potential employees in the

labor market.

employment agencies45
Employment Agencies

Commission

Preferred price is actual commission on

received for a single employee placement.

Commission is a percentage of the expected

first year earnings of the employee.

employment agencies46
Employment Agencies

Pricing Characteristics

  • Commission percentage
  • Compensation level
    • Type of position
    • Education level
    • Experience level
passenger air transportation
Passenger Air Transportation

Primary Output

Transportation of passengers over regular

routes and on regular schedules.

passenger air transportation48
Passenger Air Transportation

Average Revenue per Passenger

Preferred price is an average calculated for

a given origination/destination and seating

class (first class vs. coach).

Method allows the PPI to capture price

trends from all levels of pricing (published

and unpublished) and all distribution channels.

passenger air transportation49
Passenger Air Transportation

Pricing Characteristics

  • Region (domestic or international)
  • Market (origin and destination)
  • Cabin (first/business or coach)
summary
Summary
  • Developing a PPI for service industries is

challenging

  • Adhere to general PPI principles
  • Use lessons learned from PPIs for mining

and manufacturing industries