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ProducerPriceIndex(PPI)GuidetoContractEscalation
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EscalationGuideforContractingParties

BROWSEPPI
PPIHOME

Businessfirmsinsearchofeffectivemethodsforcopingwithchangesinpricesoftenemploypriceadjustment

PPIOVERVIEW

(escalation)clausesinlongtermsalesandpurchasecontracts.BLSestimatesthatagreementswithalifetimeworthin

PPINEWSRELEASES

thetrillionsofdollarsarecurrentlyescalatedusingtheProducerPriceIndex(PPI)familyofindexes,eitheraloneorin

PPIDATA

conjunctionwithothersourcesofeconomicdata.1

PPITABLES

Becausetheymeasurepricechangesobjectively,bothattheaggregatedlevelandforparticularproducts,freefrom

PPIPUBLICATIONS

possiblemanipulationbyeitherofthecontractingparties,PPIscalculatedbytheBureauofLaborStatistics(BLS)are

PPINOTICES

widelyrecognizedamongbusinesspeople,economists,statisticians,andaccountantsasusefulinpriceadjustment

PPIFAQS

clauses.

CONTACTPPI

ThisdocumentprovidesguidanceonthedevelopmentofescalationclausesincontractsthataretobetiedtoPPIdata.
Suchclausesshouldbewrittenwithgreatcaretoavoidseriousproblemswhencontractadjustmentsare

SEARCHPPI
Go
PPITOPICS

implemented.TheinformationinthisGuideisbasedonBLSstaffexperienceinhandlingissuesthathavebeenbrought
totheirattentioninconnectionwithactualescalationclauses.

METHODOLOGY

TheroleoftheBLSistoproviderequesteddataandtoexplaintheirunderlyingmethodologyandlimitations.TheBLS

POPULARTOPICS

doesnotencourageordiscouragetheuseofpriceadjustmentmeasuresinpurchaseagreements,salesagreements,

INFORMATIONFOR
RESPONDENTS

andcontracts.TheBLSdoesnotdirectlyassistinwritingcontracts,nordoesitprovideadviceregardingdisputes

U.S.CENSUSBUREAU

developingescalationclauses,thisGuideisintendedtoalertuserstopotentialproblemsarisingintheseareas.2

BUREAUOFECONOMIC
ANALYSIS
NORTHAMERICAN
INDUSTRYCLASSIFICATION
SYSTEM(NAICS)
U.S.STANDARD
INDUSTRIAL
CLASSIFICATION(SIC)

arisingfromcontractinterpretation.Becauseindexmethodologyandpublicationconventionscouldbecrucialin

ThisGuideisdividedintothreesections.First,anoverviewofthePPIsystemdescribesthemajorcategoriesand
groupingsoftheseveralthousandindexesthatarepublishedeachmonth.Then,guidelinesforassistinginthe
developmentofescalationclausesareoutlined.Finally,apracticalexampleofprovisionsthatmightbeincorporated
intoacontractispresented,basedontheguidelinesdiscussed,alongwithanexampleofthepriceadjustment
calculationsthatwouldbeneededtoimplementtheseprovisions.
ThisGuideprovidessummaryinformationonanumberofissuesrelatingtoPPI.ForamoredetailedreviewofPPI
conceptsandmethods,seetheBLSHandbookofMethods,Chapter14:ProducerPrices.

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tothePPI
Update

TheStructureofProducerPriceIndexes
Producerpriceindexesmeasuretheaveragechangeinpricesreceivedbydomesticproducersfortheiroutput.APPI
isanoutputpriceindex.Thatis,itmeasurespricechangesreceivedbymining,manufacturing,services,and
constructionproviders.Itdoesnotmeasurethecostofproducingagood,providingaservice,orbuildingastructure,
thoughcostsdofactorintothesellingprice.PPIdataarebasedonsellingpricesreportedbyestablishmentsofall
sizesselectedbyprobabilitysampling,withtheprobabilityofselectionproportionatetosize.Individualitemsand
transactiontermsfromthesefirmsarealsochosenbyprobabilityproportionatetosizesamplingmethods.PPIsare
basedonamonthlysampleofover100,000prices.
PPIsareorganizedinthreemajorstructures:

EmailAddress

(a)FinalDemandIntermediateDemand(FDID)System:ThefinaldemandportionoftheFDIDstructure

GO

measurespricechangesforgoods,services,andconstructionsoldaspersonalconsumption,capitalinvestment,to
government,andasexports.TheintermediatedemandportionoftheFDIDsystemtrackspricechangeforgoods,
services,andconstructionproductssoldtobusinessesasinputstoproduction,excludingcapitalinvestment.TheFD
IDsystemreplacedtheStageofProcessingsysteminJanuary2014.
(b)Commoditytype:ThecommodityclassificationstructureofthePPIorganizesproductsbysimilarityofenduse
ormaterialcomposition,irrespectiveofindustryorigin.PriortoJanuary2009,thecommoditytypeclassification
systemincludedonlygoodsbasedpriceindexes.WiththereleaseofdataforJanuary2009,PPIexpandedthe
commodityclassificationstructuretoincludeservicesandconstructionproducts.
(c)Industriesandtheirproducts:Theindustrybasedclassificationstructuremeasureschangesinpricesreceived

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forindustryoutputs.Attheindustryandindustrygrouplevel,indexestrackpricechangesforproductsandservices
soldoutsidetheindustryoforigin.Theseindexesreflectthepricetrendsofaconstantsetofgoodsandservicesthat
togetherrepresentthetotalnetoutputofindustries,asdefinedintheNorthAmericanIndustryClassificationSystem
(NAICS).
Foramoredetaileddescriptionofthesethreeindexstructures,seetheAppendixtothisdocument.
Withineachofthethreemajorstructures,indexesareavailableatdifferentlevelsofaggregationanddetail.There
arebroadFDIDindexes(forexample,Materialsandcomponentsforconstruction,Transportationandwarehousing
servicesforIntermediateDemand),broadindustryindexes(forexample,Totalmanufacturingindustries,Selected
healthcareindustries),aswellasindexesforspecificindustryproductsandcommodities(forexample,dieselfuel,
steelmillproducts,motorvehicleparts,trucktransportationoffreight,andbusinesswiredtelephoneservices).

GuidelinesforDevelopingEscalationClauses
(1)Establishthebasesellingpricesubjecttoescalation.
Theitempricesubjecttoescalationshouldbespecifiedaspreciselyaspossible.Statewhetherthebasepricerefers
toaperunitquantityoracertainvolumeofunits.Givetheeffectivemonthandyearofthebasesellingpricethis
timeperiodisoftencalledthebaseperiod.Indicatethelengthoftimethebasepricewillremainineffect.(Notethat
BLSnolongerpublishesunitpricesforanyitemwithinthePPIsystem.FromtheProgram'sinceptionuntil1985,unit
priceswerepublishedforselectedindexcategories.)

(2)Selectanappropriateindexorindexes.
AhighlevelFDIDindex,suchasFinaldemand,Finishedgoods,Processedgoodsforintermediatedemand,or
Servicesforintermediatedemandindicatethegeneraltrendofinflationatabroadlevelthatmaybeappropriatefor
theescalationagreement.TherearedetailedFDIDindexesthatexcludefood,energy,andtrade,foruserswishingto
avoidtheeffectsofvolatilepricemovementsinthesegoodsandservices.DetailedIntermediateDemandindexes
underthecategoryforProcessedgoodsforintermediatedemand(formerlycalledtheindexforIntermediate
materials,supplies,andcomponents)maybestindicatepricetrendsforsemifinishedgoods,components,and
suppliesforbusinessdemand.Indexesforspecific4,6,or8digitcommodityindexes,orforindustrybasedindexes
thatreflectproductorservicelinesorgroupingsofproductsorservices,maybetterindicatepricetrendsatamore
detailedlevel.(SeeAppendixformoreinformationaboutindexesandindexstructures.)
ContractingpartiesmaywanttoescalatethebasepricebyasinglePPIseries.Often,however,userspreferto
escalateonthebasisofseveraldataseries,includingdatafromotherGovernmentstatisticalprograms,toreflect
changesincostsofavarietyofinputs.Insomecontracts,forexample,costsofmajormaterialsandsuppliesare
escalatedwithoneormorePPIs,whilecostsoflaborareescalatedwithotherBLSseriessuchastheEmployment
CostIndex.3Insuchcases,theescalationclauseshouldspecifythepercentageweightgiventoeachindexin
calculatingthetotalescalationamount.(Seedetaileddiscussionunderguideline(9)(d).)
Contractingpartiesshouldchooseanindexorgroupofindexesrepresentingthecostsforprovidingaparticular
productorservice,ratherthananindexfortheproductitself.Forexample,ifanapparelmanufacturerwere
contractingforlongtermpurchaseswithaproduceroffinishedfabrics,itwouldbemoreadvisabletotiethe
escalationclausetoaPPIforsyntheticfibers,processedyarnsandthreads,orgreigefabrics(rawfabric),ratherthan
toaPPIforatypeoffinishedfabric.Otherwise,thepartiescouldfindthemselvesinaseriouscontractingproblemthat
wouldbedifficultfromwhichtoescape.4
Regardingthelevelofindexaggregationordetailthatmightbechosen,itshouldbeunderstoodthatwhiledetailed
indexesmaytargetcostsmorespecifically,theyarealsomorelikelytobepermanentlydiscontinuedbyBLS,orto
haveoccasionalgapsindataavailability.Contractsshouldprovideforthesecontingencies.Thishazardcanbe
minimizedifcontractingpartiesciteacommodityindexthatdoesnotgobelowthe4or6digitlevelofdetail,oran
industrybasedproductcodethatdoesnotgobelowthe7digitlevel.5
EvenwiththePPIprogram'snearlycompletecoverageoftheminingandmanufacturingsectors,notallproductsare
includeddirectlyinthePPIsampleorpublishedinthePPIsystem.Sometimesrelatedindexesorhigherlevelindexes
mustbechosenasproxiestoestimatepricemovements.

(3)Clearlyidentifytheselectedindexandciteanappropriatesource.
Theescalationclauseofacontractshouldidentifytheindexorgroupofindexesselectedbyprovidingcompletetitles
andidentifyingcodes.
Pleasenotethatthereisnosingleindextitled"TheProducerPriceIndex."Theterm"ProducerPriceIndex"referstoa
familyofindexescompiledbytheBureauofLaborStatistics.Eachindextobeusedshouldbecitedspecificallyinthe
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contractbyreferringto"theProducerPriceIndexfor..."followedbytheexacttitleandanyidentifyingcodenumber.
Theclauseshouldalsociteanappropriatesourcefortheindexselected.TheprimaryofficialsourceofPPIdataisthe
BLSWebsite.FromthePPIhomepage,datamaybeobtainedusingvariousmethods:
(a)LinktothePPIdatabasetoaccessvariousmethodsfordownloadingdata.Foranexplanationofthesedatabase
tools,linktothePPIDataRetrievalGuide.
(b)Themonthlyperiodical,PPIDetailedReportincludesallPPIscurrentlyinpublication,andisavailableonlineeach
monththedayPPIdataarereleased.Thispublicationprovidescurrentmonthindexvalues(firstissued),previous
monthindexvalues(firstissued),4monthpriorindexvalues(revised),aswellas1monthand12monthratesof
change.
(c)ThePPInewsrelease,publishedmonthly,providesindexdata,1month,and12monthpercentchangesfora
subsetofmorewidelyusedPPIs.LinktoPPINewsReleaseandArchivedPPINewsReleasesforcurrentandarchived
PPInewsreleases.
Contractingpartiesshouldnotcitetablenumbersortabletitlesintheirescalationcontracts,sincetheyaresubjectto
change.BLSsourcesarepreferabletosecondarysources,suchasothergovernmentpublicationsorprivatefirms.If
contractingpartiesagreetoobtainindexvaluesforescalationoverthetelephonefromBLSstaffmembers,the
escalationclauseshouldspecifyappropriateproceduresandwhethersubsequentverificationfromapublishedsource
isnecessary.

(4)Specifywhetherseasonallyadjustedindexesorunadjustedindexesaretobe
used.
Ingeneral,seasonallyadjustedindexesarenotappropriateinescalationagreements.Becausepriceadjustment
clausesusuallyareintendedtocaptureactualpricechanges,contractingpartiesnormallywouldnotwanttoremove
seasonalpricemovementsfromtheiradjustmentcalculations.

(5)Statethefrequencyofpriceadjustment.
Theescalationclauseshouldspecifywhenpriceadjustmentsaretobemade,suchasquarterly,semiannually,or
annually,orsomeotherperiod.Toconformtotheproceduredescribedinguideline(9)below,priceadjustments
shouldbecalculatedoveranintervalwhosebeginningpointisthecontract'sbaseperiod.Thisisthetimeperiod
associatedwiththechosenbaseprice.Foradiscussionofbaseprice,seeguideline(1).
Difficultiescanbeencounteredwiththosecontractsthatdonotdesignateaspecificfrequencyforpriceadjustment,
butratherstatethatthelatestdataavailableasofacertaindateshouldbeusedforadjustment.Guideline(7)
expandsuponthisissue.
NotethatPPIdataarepublishedasmonthlyindexesandasannualaveragesforcalendaryears.MonthlyPPIsare
representativeoftheentiremonthanddonotrefertoaspecificdayofthemonth.Avoidwordingsuchas"theindex
foraluminummillshapes,PPIcommoditycode102501,asofSeptember30,"sinceseveraldifferentandequally
plausibleinterpretationsarepossibleforsuchlanguage.Forexample,"asofSeptember30"couldrefertotheindex
thatwasavailableonSeptember30,whichwouldbetheAugustfigure.ThatphrasealsocouldrefertotheSeptember
index.ItcouldevenmeantheOctoberindex,sincetheSeptemberindexwouldbebasedoninformationsuppliedto
BLSwellbeforeSeptember30.

(6)Provideformissingordiscontinueddata.
Occasionally,aPPImaybeunavailableforaparticulartimeperiod,usuallybecausepriceinformationwasnotsupplied
byasufficientnumberofsurveyrespondentstomeetBLSpublicationstandards.Highlydetailedindexesaremore
susceptibletothisproblemthanindexesforbroadergroupings.Forexample,thePPIforMetaltanksandvessels,
customfabricatedandfielderected,code10720152,wastemporarilyunavailablefromJuly2011toSeptember2012.
Duringthatperiod,contractingpartiesmighthaveusedcode107201,Metaltanks,orsomeotherseriesoftheir
choosing.EscalationclausesshouldprovideproceduresfortimeswhenPPIdatadonotpublish.
Sometimesanindexispermanentlydiscontinuedifaproductdeclinesinmarketimportance.Thismostcommonly
occursatthetimeofperiodicresamplingofindustriesandtheiroutput.Asisthecasewhenanindexfailstomeet
minimumpublicationstandards,escalationclausesshouldprovideguidanceforsuccessorindexesincaseswhen
originalindexesarediscontinued.Adefaultprovisionthatcallsforusingthenexthigherlevelseriesmightbeincluded
inthecontract.
NotethatifBLSmerelychangesthetitleorrecodesanindex,itisconsideredtobethesameseries,andtherefore,
thissituationshouldnotnecessitateanycontractrenegotiation.TheonlinemonthlyperiodicalPPIDetailedReport
routinelyprovideslistsofrecodedindexeseachtimetherearesamplechanges.Normally,theselistsappearinthe
JanuaryandJulyissues.

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(7)Specifythatcalculationsofpriceadjustmentsshallalwaysusethelatestversion
ofthePPIdatapublishedasofthedatespecifiedforsuchcalculations.Thisrequires
contractingpartiestoexplicitlyagreeonthebaseandcomparisonmonthsemployed
bytheescalation,aswellastheprecisemonthandtheapproximatedatethatthe
priceadjustmentcalculationsaretobemade.
Adherencetothisprincipleanditsimplicationswillpreventmanypotentialproblems.Contractsthatfailtoincorporate
thisguidelinewillinsteadneedtospecifywhichversionofPPIdatashouldbeused,because:
(a)BLSroutinelyrevisesPPIdata4monthsafterinitialpublication
(b)PPIdataarerebasedatinfrequentintervalsand
(c)onrareoccasions,PPIdatamaybecorrected.
Amongotheradvantages,followingguideline(7)shouldresolveanyambiguitiesarisingduetothefactthatallPPInot
seasonallyadjusteddataareroutinelysubjecttorevisiononce,4monthsafteroriginalpublication,toreflectlate
reportsandcorrectionsbyrespondentsinthePPIsurvey.Revisionsareusuallysmallatthehigherlevelsofindex
aggregation,butmayberelativelylargefordetailedindexes.TheversionofanyPPIpublished4monthsafteritsinitial
publicationisconsideredfinalandwillnotchangeagain,barringcorrectionsorrebasing,aseparatematteraddressed
inguideline(8).6
Tofollowguideline(7)effectively,itisessentialtospecifynotonlyfrequency/intervalforescalation,butalsothe
approximatedateonwhichthepriceadjustmentistobemade.Currently,PPIdataareusuallypublishedbetweenthe
10thandthe18thofthemonthfollowingthereferencemonthinquestion.(However,theJanuarydatareleasein
Februarymightoccurafewdayslater.)Therefore,acontractmightstatethatpartiestoanescalationagreement
shouldcontactthePPIpriortothe10thofthemonthfollowingthedesignatedmonthforescalationinordertoverify
thedatethatdatawillbeavailabletoenactthepriceadjustment.Allfirstpublishedindexesforagivenmonth,aswell
asfinalindexesforthefourthmonthearlier,areconsideredofficiallypublishedandareavailableonthedayofrelease
ofthosedata.
Thecontractingparties'selectionofthedateforpriceadjustmentshouldbemadeonlyaftertheyhaveagreedon,(a)
thebaseperiodreferencemonth,(b)intervalforpriceadjustment,and(c)whetherthecalculationistobebasedon
thefirstpublishedorthefinalindexvaluesfortheescalationmonth.Itisvitaltoaddressthesemattersbeforea
contractissigned.Otherwise,disagreementsmayarisewhenthefirstpublishedandfinalversionsoftheselected
indexaredifferent.
Ifcontractingpartiesdonotspecifyanexactdateformakingpriceadjustments,thecontractshouldatleastspecify
whetherfirstpublishedorfinaldatashouldbeusedforcalculations.Thefinalversionofthedatafortheescalation
monthshouldbespecifiedwheneverfeasible,becauseonlyfinaldatawillberebasedretroactivelywheneverBLS
updatesthePPIreferencebase.Contractingpartiesmightchoosetousefirstissuedindexesforthecurrentperiodof
theescalationifcapturingmorerecentpricemovementsisvaluedbythepartiestotheagreement.
Anyprocedurethatdepartsfromguideline(7)byfailingtospecifytheversionofthedataorthedatewhentheprice
adjustmentistobemade,needstobeconstructedsothatitwillbeinharmonywiththefrequencyofprice
adjustment,asspecifiedelsewhereinthecontract.Thisisdiscussedinguideline(5).
Acontractshouldnotrefertoanindexvalueassociatedwithabaseprice,butinsteadtoitsmonthandyearalone.For
example,thefollowingreferencecouldproveproblematic:
Dividethecurrentindexvalueby103.9(whichisthevalueoftheindexforthebaseperiodJanuary2010)and
then....
Rather,itshouldbewritten:
Dividetheindexvaluewhichcorrespondswiththemonthassociatedwiththecontractescalationbytheindex
valueforJanuary2010,whichrepresentsthebaseperiodindexvalue,andthen....

(8)Avoidlockingindexesusedforescalationtoaparticularindexreferencebase
period.
Contractingpartiesshouldfollowtheprincipleofguideline(7)bycalculatingpercentchangesusingindexesexpressed
ontheindexreferencebaseperiodinusewhenthecontractescalationisapplied.Forexample,ifacontractcalledfor
apriceadjustmenttobemadeusingdataforDecember1987publishedinJanuary1988(whichwasjustpriortothe
rebasingthatbecameeffectiveonFebruary12,1988),indexesexpressedontheoldreferencebaseof1967=100
wouldhavebeenused.
ComprehensiveindexbaseperiodchangestothePPIsystemhavebeenroutine,althoughinfrequent.Themostrecent
largescaleconversionoccurredwhentheindexreferencebaseperiodwassetto1982=100inearly1988.Thiswas
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thefirstsuchrebasingsinceBLSadopted1967asthestandardin1971,andthatinturnwasthefirstrebasingsince
the195759basewasadoptedin1962.Previously,thestandardreferencebaseperiodwasupdatedroughlyevery10
years.7
RelyinguponacurrentindexreferencebaseperiodassetbyBLSwillnotaffectcalculations,exceptfordifferences
relatedtorounding.However,roundingcouldmakeameaningfuldifferencewhenthedollaramountofacontractis
verylarge,oriftheindexpriortorebasingstoodatarelativelyhighlevel.
OfficialPPIdatabasedonthecurrentreferencebasearenotavailableonpreviousindexreferencebaseperiods.
Further,asageneralrule,estimatingaconversionofPPIdatatoanoldbaseforthepurposeofcontractualprice
adjustmentisinadvisablebecausesuchamethodcouldwellbechallengedforreferencingsomethingotherthan
officialgovernmentdata.
However,forpartieswantingtolookbacktothepriorindexreferencebase,rebasingfactorsareonlymadeavailable
byBLStoconvertdataonthecurrentstandardreferencebaseperiodtotheimmediatelyprecedingone.Forexample,
therearenoofficialrebasingfactorstoconvertdataonthe1982=100basebacktothe195759=100indexbase.
Rebasingisnotconsidered"revising,"becausetherelativemovementsofanyseriesovertimearenotaffected,
outsideofrounding.Theabsolutelevelofanyindexhasnointrinsicmeaningotherthanrelatingameasurementtothe
baseyear,whichisitselfarbitrarytoadegree.
Oldercontractsmayspecifyuseoforiginallypublishedindexes,particularlysincethiswasrecommendedbyBLSinthe
September1979versionofthisGuide(BLSReport570).BLSisnowstronglydiscouragingsuchlanguageinescalation
contracts,inaccordancewithguidelines(7)and(8),recommendingthatthelatestavailableversionofindexdatabe
used.Inaddition,BLSdoesnotmaintaindatabaserecordsfororiginallypublishedindexes.Asaresult,noofficial
versionsofsuchoriginallypublishedindexesarereadilyavailable.

(9)Definethemechanicsofpriceadjustment.
(a)Simplepercentagemethod.
Onemethodofpriceadjustmentistohavethebasepricechangedbythesamepercentageasthepercentchangeina
selectedPPI.Toillustrate,supposethatacontractescalationclausecalledforusingtheintermediatedemandPPI
titledMaterialsandcomponentsformanufacturing,notseasonallyadjusted.Alsosupposethatthevalueofthisindex
was178.4forDecember2010,themonththatcorrespondswiththebasepriceforescalation,$1,000perunit.Twelve
monthslater,whenDecember2011datawerereleasedandthefirststipulatedpriceadjustmentwastobemade,the
indexvalueforDecember2011,publishedmidJanuary2012,was187.7.Thepercentchangerepresentsanincrease
of5.2percentintheindexforMaterialsandcomponentsformanufacturinganda$52perunitincreaseinthepricefor
theescalatedproduct.(Seebelow.)
Indexattimeofcalculation,December2011:....................187.7
Dividedbyindexattimebasepricewasset,December2010:.....178.4
Equals..........................................................1.052
Baseprice.....................................................$1,000
Multipliedby..................................................1.052
Equalsadjustedprice..........................................$1,052
Inlateryears,thisprocedurecouldbeappliedagainbytakingthenextyear'sDecemberindexvalue,dividingbythe
indexvalueatthetimethebasepricewasset,andproceedingasdescribedabove.Forexample,letusassumethat
thiscontractcontinuedthroughtheyear2013.InmidJanuary2013,theDecember2012indexwouldbereleasedby
PPI.TheratioofpricechangewouldbederivedbytakingtheDecember2012indexanddividingbytheDecember
2010value,andmultiplyingthisresultbythebasepriceof$1,000toprovideanupdatedpricefor2013.
Indexattimeofsecondcalculation,December2012:.............187.2
Dividedbyindexattimebasepricewasset,December2010:.....178.4
Equals..........................................................1.049
Baseprice.....................................................$1,000
Multipliedby..................................................1.049
Equalsadjustedprice..........................................$1,049
Notethatinthisexample,becausepricesformaterialsandcomponentsformanufacturingdeclinedin2012,the
escalatedpricein2013wouldbeslightlylowerthanitwasin2012.

(b)Escalationofaportionofthebaseprice.
AnotherproceduresometimesemployedidentifiesaportionofthebasepricetobeescalatedbyaselectedPPI,while
thebalanceremainsfixed.Toillustrate,supposethatanitemhasabasepriceof$1,000,ofwhich$700istobe
escalatedbytheindex,whiletheother$300remainsunchanged.Todeterminethe"certaindollaramount"thatis
neededforcitationinthecontract,dividethedesignatedvariableportionofthebaseprice($700)by100,inthiscase
yielding$7foreach1.0percentmovementintheindex.BasedonthepriorexampleusingthePPIforMaterialsand
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ComponentsforManufacturing,thebasepricewouldbeescalatedto$1,036.40afteroneyear.
Baseprice......................................................$1,000
Indexattimeofcalculation,December2011:.....................187.7
Indexattimebasepricewasset,December2010:.................178.4
Equalspercentchangefor2011:....................................5.2
Escalationadjustment:...................................5.2$7=$36.40
Equalsadjustedprice:$1,000.00(baseprice)+$36.40(adjustment)=$1,036.40(escalatedprice)

(c)Indexpoints.
Relativelyfewescalationclausesadjustcontractpricesonthebasisofchangesinindexpoints.TheBLSstrongly
discouragesthispractice,becausechangesinindexlevelsdonotreflectpercentchangesinpriceswhenthevalues
moveawayfromtheirbaselevelof100.Forinstance,intheearlierexample,anindexpointchangeof9.3reflected
the5.2percentincreaseinpricesformaterialandcomponentsformanufacturingfromDecember2010toDecember
2011.Escalatingbyindexpointchangeshastheeffectofoverestimatingthepercentagechangeinpriceswhenthe
indexisabove100andunderestimatingthepercentagechangeinpriceswhentheindexlevelisbelow100.In
addition,contractsemployingtheindexpointmethodaresubjecttocomplicationsrelatingtoindexbasedatechanges.

(d)Compositeindexes.
Somecontractsprovidefortheconstructionofacompositeindexbasedonseveralseries.Theadvantageofa
compositeindexisthatitmaymoreaccuratelyidentifytheappropriatechangeforabaseprice(seeguideline(2)),
sinceitwouldrefertoseveralofthecostsinvolvedinproducingtheproductorserviceinquestion.However,a
compositeindexentailsmorecalculationsatthetimeofadjustmentthanthesimplerproceduresdescribedearlier.
ThoughthesecompositecalculationsoftenemployofficialBLSdata,thesecompositeindexesconstructedbythe
contractingpartiesarenotofficialBLSdata.
Theproceduresforspecifyingacompositeindextobeusedinanescalationagreementareillustratedbythefollowing
steps:
(i)Choosetheindexesthatwillrepresentthedifferentcostsinvolvedinproducingthegoodorservice.Forexample,
indexesforenergy,machineryandequipment,services,andlabormightprovideanappropriatemix.
(ii)Choosetheappropriateweightsfortheseindexes,inaccordancewiththeproportionoftheproductionbudget
whichmaybedevotedtothesevariouscategories.Theweightsshouldbeassignedasproportionsandsumto1.0,the
equivalentof100percentcoverage.Forexample,aproducermightdecidethatforaspecificescalationcalculation,
theappropriateweightingsforenergy,machineryandequipment,services,andlabormightbe0.15,0.25,0.25,and
0.35,respectively.
(iii)Theweightsshouldberepresentativeofthetimeperiodassociatedwiththebaseprice,whichwouldbethebase
periodforanycalculations.
(iv)Onceindexeshavebeenchosenandrelativeproportionsassigned,itisnecessarytorebasealloftheoriginal
indexdatatothecontract'sbaseperiod.Thisisdoneforeachseriesbydividingtheindexesthatcorrespondtothe
escalationmonthandyearbytheirindexvaluesinthebaseperiod,andthenmultiplyingtheresultby100.Forthisand
followingsteps,notethedetailedexampleinTable1thatfollowsintheExampleofEscalationProceduressection.
(v)Derivethevalueforthecompositeindexbymultiplyingtherelativeweightsforeachcostcategorybytherebased
indexvaluesforeachindexseries.Then,sumtheresults.
(vi)Usingthecompositeindexvaluescreatedinstep(v),calculatethecurrentadjustmentinstandardfashionthat
is,usingtheproceduredescribedinguideline(9)(a).

(e)Limitsforpriceadjustment.
Escalationclausessometimesreferenceafloor,aceiling,orboth,tolimitthetotalpriceadjustmentduringthelifeof
thecontract.Contractstypicallyprovidethatanescalationistoapplyinbothanupwardanddownwarddirection.On
occasion,however,contractsstipulatethatthebasepriceisapricefloorandthatpricescanonlyrise.Inaddition,
somecontractsspecifythatnopriceadjustmentsaretobemadeuntilaminimumpricechangetothecontract
escalatorhasoccurred.

ExampleofEscalationProcedures
Supposeamanufacturerofwidgetsentersintoalongtermsalescontractwithacustomer.Thebuyerandtheseller
agreetoincludeanescalationclausethatadjuststhesellingpriceyearly,upordown,toaccountforchangesin
energy,machineryandequipment,businessservice,andlaborcosts.Thefollowingisanexampleofthetermsthat
mightbeincorporatedintosuchanescalationclause.Theexampleassumestheuseofthecompositeindexmethod,
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discussedinsection(d)ofguideline(9).
(a)ThebasesellingpricefortypeAwidgetissetat$1,000perunitasofDecember2010,toremainineffectfor1
year.December2010ishereaftercalledthebaseperiod.
(b)Thebasesellingpriceshallbeadjustedinaccordancewiththepercentchangesofthecompositeindexdescribed
in(D)below.Theindexshallbederivedfromthefollowingcomponentindexes:
(i)Energy:PPIcodeID69113,Processedenergygoods,databasecodeWPUID69113,
(ii)Machineryandequipment:PPIcode114,Generalpurposemachineryandequipment,databasecodeWPU114,
(iii)Services:PPIcodeID63,Servicesforintermediatedemand,databasecodeWPUID63,
(iv)Labor:EmploymentCostIndex(ECI)forTotalCompensation(wagesandbenefits),privateindustry,goods
producingindustries,databasecodeCIU201G000000000I.NotethatthisBLSindexispublishedonaquarterlybasis,
andassuch,4thquartervalueswillbeusedfortheescalationcalculation.
PPIdatacanbeobtainedfromtheBLSWebsite,byemailingthePPIatppiinfo@bls.gov,orbycalling(202)6917705.
ToaccessdatafromtheECI,visittheECIwebsite,submitaquestionviatheonlineform,orcall(202)6916199.
(c)ThesellingpriceshallbeadjustedonorafterFebruary1ofeachyear,beginning12monthsafterthecontractis
initiated,forallyearsthatthecontractremainsactive,basedonthepercentchange(upordown)inthecomposite
indexdescribedbelow.Thecalculationwillcomparethebaseperiod(December2010)withDecemberofthemost
recentyear.PPIdataforDecemberaretypicallyreleasedmidJanuary,andEmploymentCostIndexdataforthe
fourthquarteraretypicallyreleasedbytheendofJanuary.ContactthePPIandtheECIeachJanuarytoidentifywhen
DecemberPPIsandthefourthquarterECIdataarescheduledforpublication.Allcalculationsshallbebasedonthe
latestversionsofthePPIandtheECIavailableonorafterFebruary1whentheDecemberPPIsandthefourthquarter
ECIarepublished.Allindexesforthiscalculationarenotseasonallyadjusted.
(d)Thecompositeindexshallbederivedinthefollowingmanner:
(i)Thevaluesforthecurrentperiodforeachofthe4BLSindexseriesspecifiedin(b)aboveshallberebasedtothe
referencebaseperiodDecember2010.ThisshallbedonebydividingthecurrentDecembervalueofeachindexbyits
valueforthebaseperiod,andthenmultiplyingtheresultby100.
(ii)Therebasedenergyindexshallbeassignedaproportionof0.15,representing15%.Therebasedmachineryand
equipmentindexshallbeassignedaproportionof0.25(25%).Therebasedservicesindexshallbeassigneda
proportionof0.25(25%).Therebasedlaborindexshallbeassignedaproportionof0.35(35%).Theseproportions
sumto1.00(100%),andcorrespondwiththebaseperiodofDecember2010.
(iii)Multiplytherebasedcurrentindexforeachcomponentbyitsrelativeproportion.
(iv)Thesumofthese4valuesshallresultinthecompositeindexforthecurrenttimeperiod.
(v)Dividethecomponentindexby100andmultiplythatresultbytheoriginalbaseprice.Thisfinalfigureshallbethe
adjustedpriceforthecurrenttimeperiod.
(e)IfDecemberECIdataarenotavailableforanyyear,theECIfortheimmediatelyprecedingSeptembershallbe
usedasthebasisforadjustmentofthelaborindex.IfDecemberPPIdataarenotavailableforanyyear,thePPIdata
forthemostrecentimmediatelyprecedingmonthshallbeusedasthebasisforadjustment.IfnoECIorPPIdata
havebeenpublishedforthosemonths,thenthecontractingpartiesshallagreeuponsubstituteseries.
Withthesetermsineffect,table1belowisanexampleofthedataandcalculationswhichwouldhavebeenmadeon
February1,2012todeterminethenewperunitsellingpricefortypeAwidgetsbasedonchangesinspecifiedBLS
indexesfromDecember2010toDecember2011.

Table1.SampleCalculationProceduresforaCompositeIndexCalculation
Energy

Machineryand
equipment

Services Labor

Composite
index

Baseprice=$1,000perunitsold

Escalationperiodindex(Dec.2011/4thqtr.
2011)

217.0

210.5

103.4

113.8

Dividebybaseperiodindex(Dec.2010/4thqtr.
2010)

195.7

202.1

101.4

111.1

Equals:

1.109

1.042

1.020

1.024

Multiplyby100toyieldtherebasedindex

110.9

104.2

102.0

102.4

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Assignedproportion

0.15

0.25

0.25

0.35

Multiplyrebasedindexbyassignedproportion

16.6

26.1

25.5

35.8

Addcomponentstoobtainthecompositeindex

104.0

Dividecompositeindexby100

104.0

Multiplytheresultbythebasepricetoyield
adjustedprice

$1,040

OnorafterFebruary1,2013,ifthisescalationagreementremainedineffect,anotheradjustmentwouldresult.With
thereleaseofPPIdataforDecember2012inmidJanuary2013andthereleaseofECIdataforthefourthquarterof
2012inlateJanuary2013,replacingtheDecember2011/fourthquarter2011valuesinthetablewithDecember
2012/fourthquarter2012valueswouldyieldtheupdatedescalationamount.

Pitfallstoavoid
Vaguecitationof"theProducerPriceIndex"ratherthanareferencetoaspecificindexbyitstitleandidentifying
code.Seeguideline(3).
CitationoftheAllCommoditiesindexortheIndustrialCommoditiesindexratherthananindexthatmitigatesor
doesnotincludemultiplecounting.SeethediscussionofcommodityindexesintheAppendix.
UseofunofficialestimatesderivedusingrebasingfactorsratherthanrelyingonofficialBLSdata.Seeguideline
(8).
Ambiguousreferencestodates.Seeguideline(5).
LackofaprovisionforasuccessorindexshouldthedesignatedindexbedroppedfromthePPIprogram,or
becometemporarilyunavailable.Seeguideline(6).
Lockingindexestoaspecificbaseperiod.Seeguideline(8).
Usingambiguousterms.Forexample,referringto"actual"indexes.Seeguideline(7).

Appendix:AnOverviewofPPIClassification
FinalDemandIntermediateDemand(FDID)Indexes
ThePPIFDIDstructuremeasurespricechangeforgoods,services,andconstructionsoldtofinaldemandandto
intermediatedemand.TheFDIDsystemreplacedthePPIstageofprocessing(SOP)systemasPPI'sprimary
aggregationmodelwiththereleaseofdataforJanuary2014.TheFDIDsystemexpandscoverageinitsaggregate
measuresbeyondthatoftheSOPsystemthroughtheadditionofservices,construction,exports,andgovernment
purchases.
FDIDindexesareconstructedfromcommoditybasedproduceroutputpriceindexes.Thesecommoditybasedoutput
priceindexesareallocatedtoaggregatecategoriesbasedonproportionsofusebytypeofbuyer.Themainsourceof
datausedtodeterminebuyertypeisthetabletitledUseofcommoditiesbyindustries,beforeredefinitionfromthe
BenchmarkInputOutputDataTablesoftheUnitedStates,producedbytheU.S.BureauofEconomicAnalysis(BEA).
ThetwoprimaryclassesofbuyersincludedintheFDIDsystemarefinaldemand(personalconsumption,capital
investment,government,export)andintermediatedemand(businesspurchases,excludingcapitalinvestment).In
manycases,thesamecommodityispurchasedbydifferentbuyertypes,socommoditiesareoftenincludedinseveral
FDIDindexes.Forexample,regulargasolineispurchasedforpersonalconsumption,export,governmentuse,and
businessuse.ThePPIprogrampublishesonlyonecommodityindexforregulargasoline,reflectingsalestoalltypesof
buyers.ItisthisindexthatisusedinallFDIDaggregations,regardlessofwhetherthegasolineissoldforpersonal
consumption,asanexport,togovernment,ortobusinesses,withdifferencesaccountedforintheapplicableweights
toeachaggregateFDorIDindex.Insomecases,buyertypeisanimportantpricedeterminingcharacteristic,and
resultsincommodityindexesbeingcreatedonthatbasis.Forexample,withinthePPIcategoryforloanservices,
separateindexesforconsumerloansandbusinessloanswereconstructed.Inthiscase,thecommodityindexfor
consumerloanswouldbeincludedinthefinaldemandindexandthecommodityindexforbusinessloanswouldfall
underintermediatedemand.
FormoreinformationrelatingtotheconstructionoftheFDIDsystem,see"Anew,experimentalsystemofindexes
fromthePPIprogram"intheFebruary2011MonthlyLaborReview,orvisitthewebpagedocumentingtheFDID
AggregationSystem.MoreinformationaboutoverallPPImethodologyisavailablefromthePPIchapteroftheBLS
HandbookofMethods.

Finaldemand
ThefinaldemandportionoftheFDIDsystemmeasurespricechangeforcommoditiessoldaspersonalconsumption,
capitalinvestment,governmentpurchases,andexports.Thesystemiscomposedofsixmainpriceindexes:final
demandgoodsfinaldemandtradeservicesfinaldemandtransportationandwarehousingservicesfinaldemand
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servicesexcludingtrade,transportation,andwarehousingfinaldemandconstructionandoverallfinaldemand.
Thefinaldemandgoodsindexmeasurespricechangeforbothunprocessedandprocessedgoodssoldtofinal
demand.Freshfruitsoldtoconsumersandcomputerssoldascapitalinvestmentareexamplesoftransactions
includedinthefinaldemandgoodspriceindex.Thefinaldemandtradeservicesindexmeasureschangesinmargins
receivedfortheretailingandwholesalingofmerchandisesoldtofinaldemand,generallywithouttransformation.
(Tradeindexesmeasurechangesinmarginsreceivedbywholesalersandretailers.)Thefinaldemandtransportation
andwarehousingservicesindextrackspricechangefortransportationofpassengers,aswellas,transportationof
cargosoldtofinaldemand,andalsoincludespricesforwarehousingandstorageofgoodssoldtofinaldemand.The
finaldemandserviceslesstrade,transportation,andwarehousingindexmeasurespricechangeforallservicesother
thantradeandtransportationsoldtofinaldemand.Publishing,banking,lodging,andhealthcareareexamplesof
theseservices.Thefinaldemandconstructionindextrackspricechangefornewconstructionandmaintenanceand
repairconstructionsoldtofinaldemand.Constructionofofficebuildingsisanexampleofacommoditythatwouldbe
includedinthefinaldemandconstructionindex.Lastly,theoverallfinaldemandindextrackspricechangeforalltypes
ofcommoditiessoldtofinaldemandbycombiningthefivefinaldemandcomponentindexesdescribedabove.

Intermediatedemand
TheintermediatedemandportionoftheFDIDsystemtrackspricechangeforgoods,services,andconstruction
productssoldtobusinessesasinputstoproduction,excludingcapitalinvestment.Thesystemincludestwoparallel
treatmentsofintermediatedemand.Thefirsttreatmentorganizesintermediatedemandcommoditiesbytype.The
secondorganizesintermediatedemandcommoditiesintoproductionstages,withtheexplicitgoalofdevelopinga
forwardflowmodelofproductionandpricechange.
INTERMEDIATEDEMANDBYCOMMODITYTYPE

TheintermediatedemandbycommoditytypetreatmentwithintheFDIDsystemorganizescommoditiesbysimilarity
ofproduct.Thesystemiscomposedofsixmainpriceindexes:unprocessedgoodsforintermediatedemand
processedgoodsforintermediatedemandintermediatedemandtradeservicesintermediatedemandtransportation
andwarehousingservicesintermediatedemandserviceslesstrade,transportation,andwarehousingand
intermediatedemandconstruction.Thegroupingforprocessedgoodsforintermediatedemandisequivalenttothe
SOPgroupingforintermediatematerials,supplies,andcomponents,andthegroupingforunprocessedgoodsfor
intermediatedemandcorrespondswiththeSOPgroupingforcrudematerialsforfurtherprocessing.
Theunprocessedgoodsforintermediatedemandindexmeasurespricechangeforgoodsthathaveundergoneno
fabricationandaresoldtobusinessesasinputstoproduction.Crudepetroleumsoldtorefineriesisanexampleofan
unprocessedgoodsoldtointermediatedemand.Theprocessedgoodsforintermediatedemandindextracksprice
changeforfabricatedgoodssoldasbusinessinputs.Examplesincludecarpartssoldtocarmanufacturersand
gasolinesoldtotruckingcompanies.Theindexfortradeservicesforintermediatedemandmeasureschangesin
marginsreceivedfortheservicesofretailingandwholesalinggoodspurchasedbybusinessesasinputstoproduction.
Theintermediatedemandtransportationandwarehousingindexmeasurespricechangeforbusinesstravel,aswell
as,transportationandwarehousingofcargosoldtointermediatedemand.Theintermediatedemandservicesless
trade,transportation,andwarehousingindextrackspricechangefornontradeandnontransportationservices
purchasedbyfirmsasinputstoproduction.Legalandaccountingservicespurchasedbybusinessesareexamplesof
intermediatedemandservicesexcludingtrade,transportation,andwarehousing.Finally,theconstructionfor
intermediatedemandindexmeasurespricechangeforconstructionpurchasedbyfirmsasinputstoproduction.Since
newconstructioniscategorizedinthefinaldemandportionoftheeconomyascapitalinvestment,theconstructionfor
intermediatedemandindextrackspricechangeformaintenanceandrepairconstructionpurchasedbyfirms.
INTERMEDIATEDEMANDBYPRODUCTIONFLOW

Theproductionflowtreatmentofintermediatedemandisastagebasedsystemofpriceindexes.Theseindexescan
beusedtostudypricetransmissionacrossstagesofproductionandfinaldemand.Thissystemisconstructedina
mannerthatmaximizesforwardflowofproductionbetweenstages,whileminimizingbackflowofproduction.The
productionflowtreatmentcontainsfourmainindexes:intermediatedemandstage1,intermediatedemandstage2,
intermediatedemandstage3,andintermediatedemandstage4.
Indexesforthefourstagesweredevelopedbyfirstassigningeachindustryintheeconomytooneoffourstagesof
production,whereindustriesassignedtothefourthstageprimarilyproduceoutputconsumedasfinaldemand,
industriesinthethirdstageprimarilyproduceoutputconsumedbystage4industries,industriesassignedtothe
secondstageprimarilyproduceoutputconsumedbystage3industries,andindustriesassignedtothefirststage
produceoutputprimarilyconsumedbystage2industries.Indexesforthestagestrackpricesforthenetinputs
consumedbyindustriesineachofthefourstagesofproduction.Forexample,thestage4intermediatedemandindex
trackspricechangeforinputsconsumed,butnotproduced,byindustriesincludedinthefourthstageofproduction.
Hence,theindexmeasurespricechangeintheinputstoproductionofindustriesthatprimarilyproducefinaldemand
commodities.ThemainsourcesofdatausedtodeveloptheseindexesweretheBEAtablestitledUseofcommodities
byindustries,beforeredefinitionandMakeofcommoditiesbyindustries,beforeredefinition.
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Examplesofheavilyweightedgoodsproducingindustriesinstage4includethemanufactureoflighttrucksandutility
vehicles,automobiles,andpharmaceuticals.Retailtrade,foodserviceanddrinkingplaces,andhospitalsareexamples
ofheavilyweightedserviceindustriesincludedinstage4.Stage4alsoincludesallnewconstructionindustries.
Examplesofgoodsconsumedbystage4industriesincludemotorvehicleparts,commercialelectricpower,plastic
constructionproducts,biologicalproducts,andbeefandveal.Engineeringservices,machineryandequipment
wholesaling,longdistancemotorcarrying,andlegalservicesconstituteexamplesofservicesconsumedbystage4
industries.
Examplesofhighlyweightedgoodsproducingindustriesincludedinstage3aremotorvehiclepartsmanufacturing,
animal(exceptpoultry)slaughteringandprocessing,andsemiconductormanufacturing.Servicesindustriesclassified
instage3includewholesaletradeinsurancecarriersarchitecture,engineering,andrelatedservicesandhotelsand
motels.Examplesofgoodsconsumedbystage3industriesincludeslaughtersteersandheifers,industrialelectric
power,andhotrolledsteelbars,plates,andstructuralshapes.Servicescommonlyconsumedbystage3industries
includecommissionsfromsalesofpropertyandcasualtyinsurance,businessloans,temporaryhelpservices,and
administrativeandgeneralmanagementconsultingservices.
Petroleumrefinerieselectricitygeneration,transmission,anddistributionnaturalgasdistributioncattleranchingand
farmingandplasticmaterialsandresinmanufacturingareamongthegoodsbasedindustriesassignedtostage2.
Servicesindustriesthatareheavilyweightedinstage2includemanagementofcompaniesandenterprisesnon
depositorycreditintermediationandrelatedactivitiesinsuranceagencies,brokerages,andrelatedactivitiesand
servicestobuildingsanddwellings.Goodscommonlypurchasedbystage2industriesincludecrudepetroleum,natural
gas,formulafeeds,andprimarybasicorganicchemicals.Servicesthatareheavilyweightedintheintermediate
demandstage2indexarelegalservices,businessloans,andcellularphoneandotherwirelesstelecommunication.
Goodsproducingindustriesinstage1includeoilandgasextraction,papermills,andgrainfarming.Realestate,legal
services,andadvertisingservicesareexamplesofhighlyweightedservicesindustriesincludedinstage1.Examplesof
goodsconsumedbystage1industriesarecommercialandindustrialelectricpowerandgasoline.Servicescommonly
consumedbystage1industriesincludesolidwastecollection,chemicalsandalliedproductswholesaling,and
guestroomorunitrental.Allinputspurchasedbystage1industriesarebydefinitionproducedeitherwithinstage1or
bylatterstagesofprocessing,leavingstage1lessusefulforpricetransmissionanalysis.
Seeindustrystageassignmentsformoreinformation.

Specialgroupings
InadditiontotheFDIDstructuresdescribedinthepriorsections,anumberofsupplementalindexeshavebeen
developedinordertoprovidedatauserswithindexgroupingsnotavailablethroughtheprimaryFDIDstructures.
Someexamplesofthesespecialgroupingindexesinclude:
Finaldemand
Finaldemandlessfoods,energy,andtradeservices
Finaldemandgoodsplusfinaldemanddistributiveservices
Finaldemanddistributiveservices
Totalfinished(thepersonalconsumptionandprivatecapitalinvestmentportionoffinaldemand)
Finishedgoods
Totalexports
Governmentpurchasedgoods
Governmentpurchasedservices
Personalconsumption
Personalconsumptiongoodspluspersonalconsumptiondistributiveservices
Intermediatedemand
Processedenergygoods
Processedfoodsandfeeds
Processedmaterialslessfoodsandenergy
Processedgoodsplusintermediatedistributiveservices
Unprocessedfoodstuffsandfeedstuffs
Unprocessedenergymaterials
Unprocessednonfoodmaterialslessenergy
Totalgoodsinputstostage4intermediatedemand
Totalservicesinputstostage4intermediatedemand
Totalgoodsinputstostage3intermediatedemand
Totalservicesinputstostage3intermediatedemand
Totalgoodsinputstostage2intermediatedemand
Totalservicesinputstostage2intermediatedemand
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ToviewthecompletesetofindexesincludedintheFDIDsystem,seetables1,2,and3ofthePPINewsRelease.

CommodityIndexes
ThecommodityclassificationstructureofthePPIorganizesproductsbysimilarityofenduseormaterialcomposition,
regardlessoftheirindustryoforigin.ThissystemisuniquetothePPIanddoesnotmatchanyotherstandardcoding
structure,suchastheNAICSortheU.N.StandardInternationalTradeClassification(SITC).Thehistoricalcontinuity
ofindexseries,theneedsofindexusers,andavarietyofadhocfactorswereimportantindevelopingthePPI
commodityclassification.PriortoJanuary2009,thecommodityclassificationsystemincludedonlygoodsbasedprice
indexes.WiththereleaseofdataforJanuary2009,PPIexpandedthecommodityclassificationstructuretoinclude
servicesandconstructionproducts.Table9ofthePPIDetailedReportincludesdataforcommodityindexes,organized
inahierarchalstructure,includingmajorgroupings,subgroups,productclasses,subproductclasses,andindividual
items.
Thecommodityclassificationsystemisorganizedasahierarchicalstructurethatstartswithmajorcommodity
groupings(2digitlevelofaggregation).Majorgroupings01through15encompasscommoditybasedgoodsindexes.
Majorgroupings30though61includeservicesbasedcommodityindexes,andmajorgroup80encompasses
constructionbasedcommodityindexes.Eachmajorcommoditygroupingincludes(indescendingorderofaggregation)
subgroups(3digitlevel),productclasses(4digitlevel),subproductclasses(5and6digitlevel),itemgroupings(7
digitlevel),andindividualitems(8,9,and10digitlevels).
UnlikemanyFDIDindexes,someofthetraditionalcommoditygroupingindexes,suchastheAllCommoditiesindex,
theIndustrialCommoditiesindex,and2and3digitcommoditygroupingindexes,exhibitamultiplecountingbiasin
reflectingpricechanges.Inbrief,multiplecountingbiasmeansthatpricechangesforcomponentsthatgothrough
manystagesofprocessinghaveanexcessiveinfluenceonaggregateindexseries.Thisproblemiscommonamong
highlyaggregatedPPIcommoditygroupingsbecausetheyarecalculatedfrompricechangesofcommoditiesatseveral
stagesoftheproductionprocess,whereeachindividualpricechangeisweightedbyitstotalgrossvalueofshipments
intheweightbaseyear.Thisproblemoccursbecausemanyproductsgothroughsuccessivestagesoffabricationor
processingandhavetheirpricechangescountedseparatelyateachstage.Theindexesforfinaldemand,intermediate
demandbyproductionflow,andthenetoutputofindustriesandindustrygroupseliminatethedefectofmultiple
countingofpricechanges,whiletheintermediatedemandbycommoditytypeindexesmitigate,butdonoteliminate,
thisdefect.
Toillustratethemultiplecountingproblem,supposethatthepriceofcottonrisessharply.Ifthepriceincreaseis
passedthroughbyspinnersofcottonyarnandthread,thenbyweaversofgraycottonfabric,thenbyproducersof
finishedcottonfabric,and,finally,byshirtmanufacturers,thesinglepriceincreasefortherawmaterialcottonwould
havebeenincludedfivetimesintheAllCommoditiesindexandfourtimesinboththeIndustrialCommoditiesindex
andthemajorcommoditygroupingindexfortextileproductsandapparel.Inasmuchaspricesthroughoutthe
economyarealwayschangingatdifferentrates,multiplecountingcanresultinratesofchangeforaggregatedprice
indexesthatarehighlymisleading,becausepricesofrawmaterialstendtobemorevolatilethanpricesoffinal
demandgoodsandbecausegrossoutputvaluesareusedasweightsformajorcommoditygroups.Specific,detailed
commodityindexes,suchas6and8digitcommoditybasedPPIs,andmany4digitcommoditycodes,areeffectively
freeofthismultiplecountingdefect.

IndustryIndexes
AProducerPriceIndexforanindustryisameasureofchangesinpricesreceivedfortheindustrysoutputsoldoutside
theindustry(thatis,itsnetoutput).Measuresofpricechangeclassifiedbyindustryformthebasisofsamplingand
datacollectionwithinthePPI.Theseindexesreflectthepricetrendsofaconstantsetofgoodsandservicesthat
togetherrepresentthetotaloutputofanindustry.Standardizedindustrybasedindexcodesprovidecomparabilitywith
awideassortmentofindustrybaseddataforothereconomicphenomena,includingproductivity,production,
employment,wages,andearnings.
Forabout25years(fromthelate1970sthrough2003),thePPIprogrammadeuseoftheStandardIndustrial
Classification(SIC)systemasthestructureforthecollectionandpresentationofindustrybasedpricedata.However,
theSICsystemreceivedincreasingcriticismaboutitsinabilitytohandlerapidchangesintheU.S.economy.
Developmentsininformationservices,newformsofhealthcare,expansioninservices,andhightechmanufacturing
areexamplesofindustrialchangesthatcouldnotbestudiedadequatelyundertheSICsystem.
ThePPIprogrambeganpublishingindustrybasedpricedataorganizedinaccordancewiththeNorthAmerican
IndustryClassificationSystem(NAICS)withthereleaseofdataforJanuary2004.Developedincooperationwith
CanadaandMexico,NAICSrepresentsoneofthemostprofoundchangesinstatisticalprogramsfocusingonemerging
economicactivities.NAICSusesaproductionorientedconceptualframeworktogroupestablishmentsintoindustries
onthebasisoftheprimaryactivityinwhichtheyareengaged.Establishmentsusingsimilarrawmaterialinputs,
similarcapitalequipment,andsimilarlaborareclassifiedunderthesameindustry.Theindustrywithinwhichan
establishmentisclassifiedisdeterminedbythoseproductswhichaccountforthelargestshareoftheestablishments
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totalvalueofshipments.
Inadditiontoaggregateindexestrackingpricechangesforgroupsofindustriesandindustriesasawhole,ingeneral,
theremaybeasmanyasthreekindsofproductlevelindexesforcategorieswithinagivenindustry.Everyindustryhas
primaryproductindexesthatshowchangesinpricesreceivedbyestablishmentsintheindustryforthevarious
productsmadeprimarily,butnotnecessarilyexclusively,bythatindustry.Forcontractingpartieslookingtouse
industrybasedPPIsforescalationpurposes,theseindexes,whichdirectlyrelatetothevarioustypesofprimary
productionofanindustry,aremoreappropriateforuseincontracts.Twoexamplesofprimaryproductionarecranes
producedbyconstructionmachinerymanufacturers(NAICS333120),andfinancialauditingdonebyofficesofcertified
publicaccountants(NAICS521211).Inadditiontoindexesforprimaryproductsofindustries,mostindustrieshave
secondaryproductindexesthatshowchangesinpricesreceivedbyestablishmentswithinanindustryforproducts
madechieflybyotherindustries.Someexamplesincludeminingmachineryproductionandthesellingofscrapdoneby
constructionmachinerymanufacturers,aswellasmanagementconsultingservicesperformedbyaccountingfirms.
Finally,someindustrieshavemiscellaneousreceiptsindexesthatshowpricechangesforothersourcesofrevenue,
suchasresalesofpurchasedproductsorcollectionofrents.Indexesforsecondaryproductsandmiscellaneous
receiptsgenerallyarenotconsideredappropriateforcontractescalation,sincetheyreflectanundefinedbasketof
goodsorservices.Itissuggestedthatcontractingpartieslookingforahighlevelindexforaspecificindustryconsider
usingtheindustrysprimaryproductsaggregateindex,whichbringstogetherthevariousproductsthatconstitutethe
primaryproductionofthatindustryintoasingleaggregateindex.

Footnotes
1See,Highlightsofthe2013PPIUserSurvey,BureauofLaborStatistics,BeyondtheNumbers,August2013,Volume
2,No.20,JosephKelleyandAntonioLombardozzi.
2DatarequestsandtechnicalquestionsconcerningthePPImaybeaddressedtothePPISectionofIndexAnalysis
andPublicInformation.Theycanbereachedattelephonenumber2026917705,orbyemailat(ppiinfo@bls.gov).
Pleaserefertothedesiredseriesbytitleandcode,exactlyascitedinthecontract.
3TheEmploymentCostIndex(ECI)isbasedonaquarterlysurveytypicallypublishedinthemonththatfollowsthe
completionofthecalendarquarter.BecausetheECIhasrelativelylittleindustrydetail,datausersmayhavetousea
higherlevelofaggregationthantheydowithPPIdata.However,theEmploymentCostIndexisahighlyuseful
measureoflaborcostsbecauseitcoversallworkers(notjustproductionandnonsupervisoryworkers)andbecauseit
includesnotonlywagesandsalariesbutalsoemployercostsforemployeebenefits.LikethePPI,theECIisafixed
weightindexandisnotinfluencedbyemploymentshiftsamongindustriesandoccupationswithdifferentwageand
benefitlevels.ButunlikethePPI,ECIdataarefinalwhentheyarefirstpublishedandarenotsubjecttorevision
(exceptonaseasonallyadjustedbasis).TheECIWebsiteislocatedathttp://www.bls.gov/ncs/ect/,andtheycanbe
reachedoverthephoneat2026916199.
4Fromtheseller'spointofview,acontractwhichescalatesthepriceofaproductbasedonthechangeinthePPIfor
thatsameproductmightnotprovideanappropriatebasisforchangingthebaseprice.Ifmostcompaniesreportinga
product'spricetoBLSemployedescalationclausesusingthePPIforthatsameproduct,thesefirmswouldbeunable
toraisetheirpricesuntilthePPIadvancedhowever,therecouldbenoadvanceinthePPIuntilthecompanieswere
abletoraisetheirprices.Fromthebuyer'spointofview,areversecircularityisevidentwhenthepriceofaproduct
purchasedisescalatedbythePPIforthesameproduct.Ariseinthecontractpricemaybereflectedinariseinthe
PPI,whichwouldtriggeryetanotherrise.Insummary,contractescalatorsgenerallyareputinplacetocopewith
inputcostvolatilityfromthesellerssideofthetransaction.Undercertainconditions,sellersmaynotbeableto
providetheagreedtoproductorserviceiflargeincreasesininputcostsarenotmitigated.Similarly,buyersmayfeel
littleincentivetolockinapriceovertimeoftheyperceivethatadropininputcostsaccruesonlytothesellerasa
windfall.
5Sometimes,however,governmentagencies,laws,orregulationsstipulatewhichindexorlevelofdetailmustbe
cited.
6AsanexampleofPPIpractices,firstpublishedPPIdataforDecember2012,aswellasfinaldataforAugust2012,
werereleasedonJanuary15,2013.FinaldataforDecember2012werereleasedonMay15,2013withthefirst
releaseofdataforApril2013.Finaldataforallindexesappearintherecalculatedindexcolumnofeachtableineach
issueofthePPIDetailedReport,andareavailableonlinethroughLABSTAT.Contractingpartieswhowanttouse
otherBLSseriesforescalationinadditiontoPPIsshouldbeawarethateachBLSprogramhasitsownrevisionand
correctionpolicies.
7MostofthenewFDIDindexeshaveanindexbaseofNovember2009=100orApril2010=100.However,the
goodsbasedindexesoftheFDIDsystemthatcorrespondwiththepreviousSOPmodelhaveanindexbaseof
1982=100.Somecommoditytypeindexesalsohaveanindexbaseof1982=100,butothercommoditytypeindexes,
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aswellasalloftheindustrybasedindexes,havetheirbaseperiodsetequaltothemonthandyearoftheir
introduction.

LastModifiedDate:June5,2015

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