Uses of Index Data for
Contract Price Adjustment
Breakout Session B02
Wander Cedeno, Economist
[email protected]
Lana Conforti, Economist
[email protected]
Producer Price Index (PPI) Program
U.S. Bureau of Labor Statistics
www.bls.gov/ppi
Monday, December 14th, 2015
2:15pm – 3:30pm
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• See our video on BLS products at:
https://youtu.be/6VgfKK_vXBU
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Program
• Overview of Data for Procurement Pros
Producer Price Index (PPI) and other inflation data
Definition, Coverage, & Types
Uses for supply chain analysis and economic analysis
• Workshop Contract Price Adjustment
Choosing appropriate index data
Calculations
Specifying contract terms
Solutions to avoid risk
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Disclaimer
The role of the BLS is to provide requested data and to
explain their underlying methodology and limitations. The
BLS does not encourage or discourage the use of price
adjustment measures in purchase agreements, sales
agreements, and contracts. The BLS does not directly assist
in writing contracts, nor does it provide advice regarding
disputes arising from contract interpretation. Because index
methodology and publication conventions could be crucial in
developing escalation clauses, this presentation is intended
to alert users to potential problems arising in these areas.
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PPI data in the news:
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Producer Price Index
PPI data collected=
by seller
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PPI Trade Output = Value Added
to products by their services (margin price)
Displays & Customer Convenience
Packaging & Distributing
Advertising & Bundling
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Producer Price Index
PPI data collected=
by seller
Prices received by U.S. producers for their output
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Industry Contributions to GDP
and PPI Data Available/Coverage
complete
PPI
coverage
zero
BEA.gov, Interactive Data, GDP by Industry, Gross Output, released: April 23, 2015:
http://www.bea.gov/iTable/iTableHtml.cfm?reqid=51&step=51&isuri=1&5114=a&5102=15
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Weighted transaction prices from the
sample create average price levels
Price levels are indexed to a base of 100
e.g. 200812=100 means avg. price level is set to 100 in Dec. 2008
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Index levels are interpreted
relative to each other
% Change=(Difference ÷ Original) x 100
% Change=((111.3-103.3) ÷ 103.3) x 100
+ 7.7%
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PPIs for more detailed output are weighted
together to form aggregate (combo) indexes
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111
110
PPI for Final Demand
(wpufd4),
Feb-14, 110.1
Feb-13, 108.8
+ 1.2%
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108
107
106
2012
Base: 200911=100
2013
2014
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2015
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PPI for Final Demand measures prices received for
output sold to the components of GDP
Consumption
69%
GDP
1Q 2015
$17.7 trillion
PPI for
Final
Demand
=
=
Government Investment
Purchases
17%
18%
Net Exports
-3%
Exports
13%
Imports
-16%
C
+
G
+
I
+(
+
G
+
I
+
X
-
M
)
X
C
8%
66%
PPI for Total
PPI for Personal Government
Consumption
Purchases
(1) BEA.gov, Interactive Data, GDP & Personal Income, NIPA, released: July 30, 2015:
http://bea.gov/iTable/iTableHtml.cfm?reqid=9&step=3&isuri=1&903=5
(2) BLS.gov/PPI, PPI News Release Table 1
14%
12%
Private Capital
PPI for
Equip. &
Total Exports
Investment PPIs
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Example of Economic Analysis
using PPI FD-ID data
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PPI for Unprocessed Foods & Feeds; Apr-14; 223.2
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PPI for Processed Foods; Apr-14; 214.3
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PPI for Consumer Foods; Apr-14; 212.8
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205
200
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190
Base: 1982=100
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2012
2013
2014
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Example of Supply Chain Analysis
using PPI Commodity Data
*Indexes rebased to December 200416
= 100
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Example of Industry Analysis
using PPI Industry Data
*Indexes rebased to January 2010 =17
100
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The PPI Family Tree
Price data from
Industry #1
Product
Product
Product
Product
Secondary & Misc.
Primary Products
Price data from
Industry #2
Industry
Data
Product
Product
Primary Products
Industry #1 PPI
Product
Product
Secondary & Misc.
Industry #2 PPI
Item
Items
“Commodity”
Data
FD-ID Aggregations
Item
Group
Item
Items
Item
Inputs to Industries
Aggregations
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Consumer Price Index (CPI-U) for
Contract Price Adjustment
•
•
•
Measures: Average prices consumers/households pay for goods and services
Sample: Collected by field economists visiting shopping outlets in 87 urban areas
Family Tree:
More than 87,000 prices from 23,000 outlets
Aggregates:
By Area
Food/Bev.
Apparel
Medical
Edu/Comm
Food
Housing
Transport
Recreation
Other
Energy
Other
211 Item Indexes under the 8 subgroups listed above
CPI-U All Items
Contract Uses:
– Adjusting wage, rent, and other payments to account for changes in the cost of
living
– General measure of inflation (CPI-U, All Items)
– Limited use for areas of non-coverage in the PPI (e.g. public transportation)
•
Limits: Only goods and services bought by your average household. Relatively
broad groupings of products and services.
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or email [email protected]
Visit www.bls.gov/cpi; call 202-691-7000
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Import/Export Price Index
for Contract Price Adjustment
•
•
•
Measures: Prices paid by U.S. purchasers to non-U.S. entities
Sample: Reported by a sample of business establishments (similar to PPI)
Family Tree:
Prices from Importers
Organizations:
By End Use (BEA)
By Output Industry (NAICS)
Most Goods (Monthly)
Harmonized Syst. (Customs)
Locality of Origin
•
•
Air Freight
and Air
Passenger
Services
(Quarterly)
Groupings of Products
Contract Uses:
– Imports in areas of less or non-coverage in the PPI (e.g. computers)
– Analysis of competitiveness of imports to PPI for same products
Limits: Little services data. Product groupings in some areas are broad. Data are
revised.
Visit www.bls.gov/mxp; call 202-691-7101 or email [email protected]
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Employment Cost Index
for Contract Price Adjustment
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•
•
Measures: Cost of wages and benefits paid by Employers
Sample: Reported by a sample of business establishments (similar to PPI)
Family Tree:
Quarterly survey of over 10,000 establishments, over 46,000
occupational observations
Organizations:
All Civilian
Benefits
Private Industry
9 Standard Occupation Classification (SOC)
Code Groups (e.g. Managers, sales, production)
State and Local Government
Bargaining
Status
Wages and Salaries
Region
15 Industry sectors/sub-sectors
•
Contract Uses:
– Accounting for labor input costs
– Labor intensive areas of PPI/CPI non-coverage
•
Limits: Groupings are broad. Data is quarterly.
Visit www.bls.gov/ect and call 202-691-6199 or email [email protected]
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PPI data mostly covers the supply
chain, but other BLS data adds depth
Price Inflation Data for Contract Price Adjustment
Differences: www.bls.gov/cex/oplc_program_comparisons.htm

 Producer Price Index – Prices received by domestic producers for goods and services
 Consumer Price Index– Prices paid by consumers/households for goods and services
 Import Price Index– Prices paid by purchasers to non-U.S. entities
Wage Data for Contracts: www.bls.gov/ncs/ect/escalator.htm


Employment Cost Index– Costs to employers of for employee compensation

Wage Data for Analysis: www.bls.gov/bls/wages.htm

“At a Glance” Summaries for Market Analysis
 By Industry (www.bls.gov/iag)
 By Areas of the U.S. (www.bls.gov/eag)
 The U.S. Economy (www.bls.gov/eag/eag.us.htm)
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Contract Price Adjustment
Specifications and
Calculations
BLS Guides Available at
www.bls.gov/bls/escalation.htm
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Contracting Scenario
• You are a public procurement office who
regularly buys individually bagged snack
foods from a supplier to be sold to
students in public schools.
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Choose Indexes for
Input Costs of the Contract

Choose an index or indexes
representing the costs for providing a
particular product or service, rather than
an index for the product itself.
e.g. If contracting for purchases of potato chips, it
would be advisable to tie the escalation clause to a
PPI for potatoes rather than the finished snacks.

Research Inputs:
 Ask the supplier
 Look up industry input data from Census.gov
 BEA input-output table: “Use of commodities
by industry valued at producers prices”
 Browse trade publications
 Web search
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Contracting Scenario:
Supplier’s Inputs

Food inputs 20%

Packaging 15%

Energy 15%

Labor 50%
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Get Data Step 1:
Select Program at data.bls.gov
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Get Data Step 2:
Select Database from Program Menu
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Get Data Step 3:
Follow Data Tool Instructions

All programs:
Follow all steps on
one screen
(Requires JAVA®
software and popups)
Each one-screen
step on individual
screens without the
need for pop-ups
(TIP: Hold Ctrl on
your keyboard for
multiple selections)
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PPI’s Data Seeker Guide
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Browsing PPI Data

PPI data seeker’s steps direct you to lists
of available indexes to search.
 Commodity data – indexes by similarity, end
use, material composition and sold to anyone
– FD-ID data – Commodity data combined for you into
aggregate indexes by type of buyer and amount of
processing (level on the supply chain)
 Industry data – indexes by industry of
producing establishment and sold outside of
the industry
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PPI ESCALATION
PITFALLS TO AVOID
• Using the PPI for All Commodities or Industrial
Commodities
– These have inherent issues of multiple-counting
– FD-ID indexes replaced these for overall inflation
measures
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PPI ESCALATION
PITFALLS TO AVOID
• Using seasonally adjusted indexes - generally NOT
appropriate in escalation clauses
– Buyers and sellers are facing actual prices
– Most escalations are done on an annual basis
– Seasonally adjusted data is subject to multiple revisions
• Using trade margin (retail or wholesale) indexes in place
of product indexes (see www.bls.gov/ppi/ppifocus.htm)
– e.g. A PPI for electronics stores is not a substitute for a
computers PPI
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Contracting Scenario:
Supplier’s Inputs

Food inputs 20%
 WPUID61111 Intermediate Demand Materials for food manufacturing

Packaging 15%

Energy 15%

Labor 50%
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Get Data Step 1:
Use Series Report to Retrieve Data
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Data and Export Options
Default View:
Modify by clicking:
Change Options:
Download to
MS Excel®
New View:
More tips at www.bls.gov/help
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Contracting Scenario:
Supplier’s Inputs

Food inputs 20%
 WPUID61111 Intermediate Demand Materials for food manufacturing

Packaging 15%
 WPU09130322 Coated and laminated single
and multi-web film

Energy 15%
 WPU0543 Industrial electric power

Labor 50%
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data.bls.gov
Contracting Scenario:
Supplier’s Inputs

Food inputs 20%
 WPUID61111 Intermediate Demand - Materials
for food manufacturing

Packaging 15%
 WPU09130322 Coated and laminated single and
multi-web film

Energy 15%
 WPU0543 Industrial electric power

Labor 50% (ECI data)
 CIU2013000000000I Total compensation for
Private industry workers in Manufacturing
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Index Options

Escalate by a single PPI or several data series,
including those from other data programs, to
reflect changes in costs of a variety of inputs.

The Final Demand-Intermediate Demand (FDID) indexes re-group items by class of buyer
and degree of fabrication, providing an
alternative to compiling ones’ own index.
e.g. Capital equipment, Materials for food
manufacturing, Intermediate energy

Browse available product-line and aggregate
index data to find ones that suit you
e.g. Industry v. Commodity PPIs? PPI or CPI?

Evaluate historical index data for volatility and
reliability to reduce risk
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Risk Assessment Example
with 12-Mo. % Changes
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Risk Assessment Example
with Rebased Index Data
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Example Contract Terms of a PPI
Contract Price Adjustment Clause
The base selling price for a pallet of 1,000 1oz bags of snacks is set at
$550.00 as of December 2013, to remain in effect for 1 year. December
2013 is hereafter called the reference base period. The base selling price
shall be adjusted on March 1st of each subsequent year, based upon the
percent changes (whether up or down) in the indexes described below,
between the reference base period and December of the most recent year.
All calculations for the index shall be based upon the latest version of data
published as of February 20th each year.
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Specifying an Index and Source

A specific index should be cited by referring to “the
Producer Price Index for” followed by the exact title and
code.
Industry Data Example
Commodity Data
Example
Industry: Scheduled passenger air transportation Group: Fuels
Product: Domestic
Item: Gasoline
*Series ID: PCU4811114811111
*Series ID: WPU0571
*An explanation of Series ID codes is available in the Technical Note of the
PPI
Detailed Report or through the online database

For the most up-to-date data, including revisions, access
the databases at www.bls.gov/ppi/data.htm.

For preliminary data, access the PPI Detailed Report at
www.bls.gov/ppi/ppi_dr.htm.
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Example Contract Price Adjustment
Clause Index Specifications
…in the indexes described below, between the reference base period and December of the most
recent year. All calculations for the index shall be based upon the latest version of data
published as of February 20th each year.
From the U.S. Bureau of Labor Statistics official website (www.bls.gov) :
• LABOR: Employment Cost Index (ECI), Total Compensation for Private industry
workers in Manufacturing, All workers, U.S. (CIU2013000000000I)
• FOOD: Producer Price Index (PPI), Intermediate Demand Materials for food
manufacturing (WPUID61111)
• PACKAGING: PPI for Coated and laminated single and multi-web film
(WPU09130322)
• ENERGY: PPI for Industrial electric power (WPU0543)
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Calculating a price
adjustment using one index
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•
Escalation agreements using the PPI usually involve
changing the contract’s base price by the percent change
in the level of the PPI between the reference base period
and the time period of the price adjustment.
Here is the basic formula using a single index:
New price =
=
=
=
Old price x (current period index/base period index)
$550.00 x (203.1/199.7)
$550.00 x 1.017
$559.35 (this is also a 1.7% increase, although
we didn’t explicitly calculate it)
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Calculating price adjustment
creating a composite index
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Example Contract Price
Adjustment Clause Calculation
…
• ENERGY: PPI for Industrial electric power (WPU0543)
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AVOID NOT ACCOUNTING
FOR REVISIONS
Pitfall
•
•
Not
•
accounting for
•
revisions and
errors
•
Solutions
Wait for revised data before escalating
Specify using the latest non-preliminary data
Recalculate upon the release of revision
Only readjust if the percentage change is a certain
amount different
Do nothing (If you always escalate from the base,
you’ll make up for it next adjustment)
Current Revision Policies
PPI
All data subject
to revision 4
mo. after
original
publication
CPI
IPP
Not revised
Data subject to
revision each of 3
mo. after original
publication
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ECI
Not revised
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AVOID NOT ACCOUNTING FOR
MISSING/DISCONTINUED DATA
Pitfall
Solutions
• Allow for the use of the next higher aggregate index
Not
(if it makes sense)
accounting for
• Allow a proxy index
missing or
• Replace the index with its re-code
discontinued
• Compare the deleted code with new indexes
data
available
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Example Contract Price
Adjustment Clause Exceptions
If an index is recoded, that is the replacement is a direct
substitute according to the BLS, this contract will instead use
the recode. If an index becomes unavailable the supplier may
propose a proxy index prior to December 31. The buyer will
approve or disapprove in 10 business days. If there is not
direct substitute or a proxy index approved, the next higher
aggregate index available will be used.
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DON’ T AVOID
CHECKING
ON THE
DATA
Pitfalls
Solutions
Not
keeping in
touch with
PPI
• Sign up for PPI Notices
(www.bls.gov/ppi/update.htm)
• Try retrieving your index a couple times a year; if it
becomes unavailable, check recent PPI Detailed
Reports for resampling (www.bls.gov/ppi/ppi_dr.htm)
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SOLUTIONS TO AVOID
CONTRACTING RISKS USING PPIS
Pitfalls
Solutions
• Wait for revised data before escalating
Not
• Recalculate upon the release of revision
accounting for • Only readjust if the percentage change is a certain
revisions and
amount different
errors
• Do nothing (If you always escalate from the base,
you’ll make up for it next adjustment)
Not
accounting for
missing or
discontinued
data
Not
keeping in
touch with
PPI
• Allow for the use of the next higher aggregate index
(if it makes sense)
• Allow a proxy index
• Replace the index with its re-code
• Compare the deleted code with new indexes available
• Sign up for PPI Notices
(www.bls.gov/ppi/update.htm)
• Try retrieving your index a couple times a year; if it
becomes unavailable, check recent PPI Detailed
Reports for resampling (www.bls.gov/ppi/ppi_dr.htm)
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The BLS Mission
BLS is committed to its mission to
collect, analyze, and disseminate
essential economic information to
support public and private decisionmaking. As an independent statistical
agency, BLS serves its diverse user
communities by providing products
and services that are objective,
timely, accurate, and relevant.
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