Page 86 - New Employee Onboarding

PPIs are used for a variety of different purposes. There is a general public interest in knowing
the extent to which the prices of goods and services have risen. Also, it has long been
customary in many countries to adjust levels of wages, pensions, and payments in long-term
contracts in proportion to changes in relevant prices, a procedure known as index linking or
contract escalation. Price indices have a long history for this reason.

MPPI “Rules”

1. Compares the change over time of a market basket item relative to a corresponding price
index over the same time period.
a. -4.5% change in 2015 market basket versus -6.8% change in 2015 MPPI
2. Uses budget volume of the latest (or current) year for comparison. This volume is set at
the beginning of the year following the same budgeted volume of the respective CSCS
Price Index. Volumes are not adjusted throughout the year but remain static in order to
capture one variable - the change in price over time.
a. Budgeted volume in 2015 to be used to compare changes in delivered prices
and corresponding MPPI from 2015 to 2014
b. Budgeted volume in 2012 to be used to compare changes in delivered prices
and corresponding MPPI from 2012 to 2011
3. The producer price index performance is calculated at an item level over the same
period of time as the corresponding market basket item. Ex: 2014 average price of 103
and 2015 average price of 105, represents a 1.94% increase.
4. The producer price index item level performance is then indexed against the same dollar
figure of the respective market basket item at the start of the same time period. Ex: start
time period value is $2.10/case for market basket item.
a. This starting value is then used to calculate an ending value of the respective PPI
item, using the rate of performance as previously calculated.
b. If the PPI category item increased by 1.94%, then the starting price per case of
$2.10 is increased by 1.94% to result in an ending case value of $2.14.
5. The indexed method of performance calculation of the PPI is then put through the same
case volume as the market basket mix of the MPPI, yielding the comparison of only price
change. The difference in market basket item compared to PPI item results in the net
performance differential.
6. The market basket is treated as a unique index each year
a. Items are added and deleted each year
b. Mix shifts occur
7. Data gaps in PPI are treated as the average of the most recent periods
a. For some items PPI is not consistently reported (Almonds)
b. Zeros cannot be a price result and must be deleted, otherwise it invalidates the
average price
8. PPI data can be revised for up to four months after initial release and consequently must
be updated every month up for the prior four respective months.
9. The most closely related individual PPI measure is assigned to each commodity.

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