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

Background of the SPPI

Industry-specific methodologies
2
Background of the SPPI

Defining the SPPI

Historical Perspective

General PPI Principles

Developing Service Indices

Keeping Indices Up to Date
3
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.
4
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
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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
6
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
7
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.
8
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.
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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.
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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.
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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.
12
Developing Service Indices
A comprehensive definition of the industry
output must be developed.
Primary output is the ultimate service
provided by an industry.
13
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.
14
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.
15
Developing Service Indices
If you cannot find a pricing methodology
that accurately measures the defined
output, you might not have the right output
definition.
16
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.
17
Keeping Indices Up to Date
Quality adjustment is used for keeping index
data up to date:

Explicit quality adjustment

Hedonic modeling

Other alternatives
18
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.
19
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
20
Industry-Specific Methodologies

Banking

Lessors of nonresidential buildings

Hospitals

Retail trade

Internet service providers

Professional Services

Employment Agencies

Passenger air transportation
21
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.
22
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.
23
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.
24
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.
25
Banking
Pricing Formula
Loans . . .
Interest received + service charges - reference rate
Deposits . . .
Reference rate - (interest paid - service charges)
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Lessors of
Nonresidential Buildings
Primary Output
Provision of physical space and management
of the property.
27
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.
28
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)
29
Hospitals
Primary Output
Total treatment package that patients
receive during their entire length of stay
(admission to discharge).
30
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.
31
Hospitals
Pricing Characteristics

Diagnosis Related Group
(pre-selected for each sample unit)

Principal diagnosis

Principal procedure

Type of payer

Length of stay
32
Retail Trade
Primary Output
Provision of the marketing functions necessary
to allow consumers access to purchase various
goods.
33
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.
34
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
35
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.
36
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).
37
Internet Service Providers
Pricing Characteristics

Connection speed

Data transfer capacity

Bandwidth

Services included (e.g. instant messaging, email)
38
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.
39
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.
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Professional Services
Two options for pricing:

Prices based on working time

Model prices
41
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
Manager
Senior accountant
Associates
$375
$300
$220
$125
10
40
60
180
$ 3,750
$12,000
$13,200
$22,500
Total for services rendered:
$51,450
42
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.
Charge Category
Rate
Hours X Rate
1
$40.00
$40.00
Special inspections, concrete
15
$50.00
$750.00
Concrete testing
25
$40.00
$1,000.00
Sample pick-up
6
$40.00
$240.00
Special inspections, masonry
8
$50.00
$400.00
Project mgmt – Senior project engineer
2
$80.00
$160.00
Compaction testing
Total fee
Hours
$2,590.00
43
Employment Agencies
Primary Output
Employment agencies are essentially
engaged in the business of connecting
employers and potential employees in the
labor market.
44
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.
45
Employment Agencies
Pricing Characteristics

Commission percentage

Compensation level

Type of position

Education level

Experience level
46
Passenger Air Transportation
Primary Output
Transportation of passengers over regular
routes and on regular schedules.
47
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.
48
Passenger Air Transportation
Pricing Characteristics

Region (domestic or international)

Market (origin and destination)

Cabin (first/business or coach)
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Summary



Developing a PPI for service industries is
challenging
Adhere to general PPI principles
Use lessons learned from PPIs for mining
and manufacturing industries
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