Stats SA to revamp key measure of PPI
October 5, 2009
By Ethel Hazelhurst
Crucial economic data from Statistics SA will be upgraded. On Friday, the agency announced a revamp of its producer price index (PPI) to better reflect price shifts in the production side of the economy.
A vital spin-off of the exercise will be a more accurate view of economic activity as a whole.
The link is that producer prices are used to deflate nominal gross domestic product (GDP) in order to show how much of the change in GDP represents real growth (GDP minus inflation) and how much is due to inflation. If PPI is misleading GDP figures could be wrong.
Another consequence of the upgrade, as well as of the previous revamp in 2008, is that PPI is no longer a reliable lead indicator of consumer prices - a trend which has become obvious over past months as producer prices fall, while consumer prices continue to rise ahead of the Reserve Bank's 3 percent to 6 percent target range.
The link between producer and consumer prices is becoming tenuous as their components are becoming increasingly different.
For instance, activity in the services sector, which makes up 46 percent of the consumer price index (CPI), is not relevant to PPI. In addition, CPI is directly affected by changes in the prices of imported goods while PPI is only indirectly affected.
Stats SA adviser Jacob Ryten said the exchange rate might be a more accurate lead indicator to CPI than PPI.
Eight researchers are starting work on the revamp, which will be completed by 2012, at which point Stats SA will produce five main PPI figures each month. Two will be for manufacturing, measuring both final products and inputs to further processing, and there will be one for agriculture, one for mining and one for utilities.
Stats SA would continue to provide a breakdown on goods exported and imported, but the agency would not necessarily produce an overall figure, said Rashad Cassim, who is responsible for economic statistics.
Ryten said an overall figure would not be technically "meaningful" because there was no way of correctly weighting the different components within one index.
There are several reasons for the decision to restructure PPI and how the information is derived. Cassim said hi-tech changes to modern manufacturing alone required a wholesale revision of the process. Rapid advances in technology alter the inputs to and methods used in the production process.
Another reason for the review is to eliminate double counting that remains after the 2008 changes. By distinguishing between the prices of goods intended primarily for use in further processing and the prices of goods intended primarily for domestic sale or export, double counting would be avoided.
Previously both PPI and CPI figures were weighted on sales volumes, but since 2008 PPI figures have been weighted by "value added" in the production process.
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