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Changes to Broaden Producer Price Index, Make It Less Volatile

By Associated Press – Feb 18, 2014 at 2:56PM

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All told, the changes will double the index's coverage to more than 75% of the economy.

WASHINGTON (AP) -- One of the U.S. government's measures of inflation is being revamped to provide a more comprehensive picture of the economy.

The Labor Department's producer price index had previously tracked only the wholesale prices of goods. Now, beginning with Wednesday's release of January data, the index will also cover services and construction.

By tracking what manufacturers and farmers charged for their goods, the producer price index has traditionally provided an early read of inflation trends. It captured how much of the change in oil, grains and other raw material costs was being passed on by producers.

The producer price index is issued a couple of days before the release of a separate measure, the consumer price index. The consumer index is the broadest and most widely followed gauge of inflation. It already covers almost all the U.S. economy and isn't affected by the changes to the producer index.

The producer price index has grown out of date as services such as banking, retailing and health care have captured an ever-greater share of the U.S. economy. The inclusion of services and construction should improve the index's ability to track inflation at the producer level, economists say.

The new index is "a far superior measure of the types of costs that will ultimately pass to consumers," Peter D'Antonio, an economist at Citigroup, wrote in a research note. "We think the new release will increasingly become a market focus."

Another change to the index: It will cover goods and services that are exported or bought by the government. Previously, only goods bought by consumers and businesses were included.

All told, the changes will double the index's coverage to more than 75% of the economy. It should better pinpoint where inflation pressures might be occurring. For example, the old index tracked only the wholesale price that gas station owners paid refiners for gas. The new index will also track the cost of shipping the gas and the price markups that the gas station owners add.

The broadening of the index's focus should also make it less volatile. The previous gauge was heavily influenced by changes in oil and gas prices, which tend to fluctuate sharply.

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