HISTORICAL REVISIONS TO COMPUTER PRODUCER PRICES

Transcription

1 HISTORICAL REVISIONS TO COMPUTER PRODUCER PRICES Author: MARTIN BRAND (Business Prices and Sales Division, ONS) 1 Introduction 1.1 This article describes historical revisions made to the Producer Price Index (PPI) for personal computers for the period 1996 to date. The revisions have been made in the PPI First Release for May published on 11 June 2001 (the effects on the overall PPI are very small). The improvements made to the six-digit index for computers and laptops are the culmination of follow up work to one of the recommendations made in ONS Review of Short Term Output Indicators (STOIR). The revision largely reflects the improvements in the quality of prices provided to ONS by one or two key contributors. 1.2 There is also an accompanying article on the National Statistics website by Prabhat Vaze which is a sensitivity analysis examining the effects of different movements in ICT deflators on the National Accounts. 2 Background 2.1 The Producer Price Index is published monthly by the Office for National Statistics. The output price index covers the whole of manufacturing and can be broken down into around 1,400 very detailed six-digit indices. Most of these are currently published, the exception being where to do so would risk the disclosure of an individual company s information. 2.2 One such six-digit index is that for personal computers and laptops (300212). This index has attracted a lot of attention because of the fast moving nature of the industry and the difficulties of measuring high tech areas. It is an area where prices after quality adjustment are expected to fall. 2.3 One of the aspects studied in STOIR in October 2000 was a comparison between the UK Producer Price Index at this detailed level and its US counterpart. The US computer PPI has fallen much faster in recent years and it was recommended that ONS should give work on computer prices a high priority to ascertain the reasons for this.

2 2.4 Whilst the six-digit index is of interest in its own right, price index quality at the six-digit level (of which there are very many in the PPI) cannot be considered as robust as at the more aggregated four-digit level. It should be noted that the six-digit index is not generally used directly at this level for the deflation of National Accounts. The broader based four-digit index (computers and other information processing equipment 3002), which includes the six-digit index, is used to deflate the current price turnover figures used in the index of production. 2.5 Computer price deflators are only one of the aspects of the research work currently being undertaken by ONS into measurement problems associated with information and communication technology (ICT). For example, work is currently in progress regarding the measurement of the level of capital expenditure on software. 3 General issues relating to quality adjustment 3.1 The STOIR report (and other commentators) hypothesised that the difference in international PPIs for computers might very well be due to different methods of quality adjustment. The UK uses (for all products within manufacturing) a quality adjustment method based on either manufacturer s costs or option costs. If an extra characteristic (i.e. option) is added to the specification of a product, the producer is asked whether this is priced separately. If so, the ONS adjusts the price by half the cost of the new option, to allow for the fact that standardising an option allows producers to exploit economies of scale. However, the preferred method for producer prices is to ask the manufacturer for an estimate of the cost of upgrading the specification. This amount is then fully taken into account in the quality adjustment of the price. This is the method used predominantly for computers. 3.2 Many countries use similar methods. However, the US PPI is based on a hedonic model. The hedonic approach is a mathematical model constructed which estimates the price differences due to various characteristics, such as memory size, as a means to quality adjust producer prices. Commentators have suggested that the hedonic methods used by the US may result in their indices falling much faster than other countries. 3.3 A full description of quality adjustment methods and their pros and cons is beyond the scope of this article (more discussion is contained in Prabhat Vaze s article, including further references). It should be borne in mind that quality adjustment represents only part of the picture regarding data quality. Obtaining reliable quotes on a correct definitional basis and maintaining accurate data in fast changing industries are also very important considerations. There are also other important methodological considerations such as the representativity of the sample and the estimation method used.

3 4 Findings of the UK study 4.1 The work ONS conducted following the STOIR report initially concentrated on a detailed investigation of the six-digit index and the individual company price quotations comprising it. The historical index see Graph 1 - showed a concerning feature: it is flat from around the beginning of Graph 1. Existing UK PPI for computers and laptops (6 digit index) Index value 1995 = Apr-01 Jan-01 Oct-00 Jul-00 Apr-00 Jan-00 Oct-99 Jul-99 Apr-99 Jan-99 Oct-98 Jul-98 Apr-98 Jan-98 Oct-97 Jul-97 Apr-97 Jan-97 Oct-96 Jul-96 Apr-96 Jan A very few producers dominate the UK home market (i.e. manufacturers making computers in the UK for sale within the UK). Note that imports of computers are excluded, being measured separately - ONS is currently developing imported capital goods price indices for computers. 4.3 ONS was therefore able to engage in a lengthy dialogue with these key home producers. After some investigation, significant reporting errors were discovered. For example, one key manufacturer had been providing transfer prices during 1999 and 2000 these are the artificial internal prices charged between companies within the same enterprise group within the UK and as such do not represent the desired market prices. 4.4 ONS has worked closely with one or two manufacturers to obtain a much improved set of historical quotes. It was decided to obtain data back as far as possible and in the event major improvements have been possible from the beginning of 1996 to the present date. The period most affected has been the last two years. 4.5 The correction of these historical quotes has a major effect on the PPI at the six-digit level. In addition to this major improvement in the basic data, a difficult problem then arose regarding the quality adjustment of the new historical price quotes, given that computer models tended to change typically every six to nine months. ONS was unable to use its normal method of quality adjustment. This is because usually for the PPI such changes are made in real time i.e. when they happen. This permits the normal method i.e. a dialogue takes place with the manufacturer who provides information either on manufacturers costs (taken 100%) or on option costs (taken 50%). However, this normal procedure could not be followed in this one-off exercise because the manufacturers had no historical records of such information to accompany the new quotes.

4 4.6 Therefor a special procedure had to be adopted for this circumstance. The ONS obtained computer magazines going back some 5 years and examined the (retail) prices. It was then possible to compare computer models and price differences at the relevant time. The derived differences in retail prices were assumed to reflect the retail/consumer valuation of quality difference. The resulting amounts were then halved, in order to adjust for: Cost margins in the supply chain, in order to get back to producer prices. To allow for the fact that such margins may be higher for new models whilst lower for older models which are discounted towards the end of their life cycle. 4.7 An alternative method of quality adjustment using component prices was also examined. This method entails using the price difference of components sold separately in magazines e.g. the difference in retail prices for a 233MHz versus a 166MHz CPU chip, or for an increase in memory or disk size. However, both ONS and its external professional adviser came to the view that this approach was less appropriate for these long run PPI revisions since many of the upgrades historically were major reconfigurations within the computer. Component changes do not capture associated hardware changes e.g. motherboard upgrades, new internal architecture or extra ports. 4.8 ONS found that both the computer method adopted and the component method gave broadly similar results over the five years studied. ONS has also compared the one-off method used with the normal procedure (manufacturers costs) where possible. 5 Results 5.1 The new price quotes provided, whilst only for one or two manufacturers, had a major effect on the index because of the dominance of the market by a few manufacturers. Graph 2 shows the UK PPI before and after revision, and compares this with other countries PPIs as well as the UK Harmonised Index of Consumer Prices (HICP). Whilst the HICP is not strictly comparable, since clearly this represents retail prices and includes imports, nevertheless it is thought to be of general interest. Graph 2. Computer PPIs (including revised UK series) Index value 1995 = Apr-01 Jan-01 Oct-00 Jul-00 Apr-00 Jan-00 Oct-99 Jul-99 Apr-99 Jan-99 Oct-98 Jul-98 Apr-98 Jan-98 Oct-97 Jul-97 Apr-97 Jan-97 Oct-96 Jul-96 Apr-96 Jan-96 UK HICP: Information processing equipment (linked to PPI new series at Jan 96) UK PPI (Old): Laptop and desktop PC's UK PPI (New): Laptop and desktop PC's US PPI: PCU3571#14 - Personal computers & workstations (excluding portable computers) (relinked to 95 = 100) Germany PPI*: 3002 Computers and other information processing equipment * Germany do not produce an index for the lower level Computers and other information processing equipment (3002) used.

5 5.2 The revised UK index falls faster than the old version, particularly during the last two years. The latest level for the index at around 23 is near to the HICP at the same date. The index is now much closer to that for the US although it should be noted that some other countries (Germany is shown on the graph) may have price indices that are higher. 6 Effects of the six-digit revision on aggregates 6.1 The revision to the six-digit index in the PPI has been carried through to the four-digit, twodigit and all manufacturing PPI from 11 June 2001 (there have also been revisions made to export price indices). The effects on the all manufacturing PPI are considered small, perhaps negligible. These are as follows: Table 1. Effect of revisions on all manufacturing output price index percentage Year End Cumulative effect on level Effect on annual growth The changes to the PPI will also impact on the National Accounts, since this six-digit index feeds into the four-digit index computers and other information processing equipment which is used extensively for deflation of ICT goods within the National Accounts. The effects will be incorporated within the wider revisions and improvements in September with the publication of the Blue Book. 6.3 Although precise estimates are therefore not yet possible, some crude estimates have been made. The effect on the Index of Production via the deflation of the computer industry s sales can be calculated, taking into account both revised PPIs and export prices. This is provisionally estimated as 0.4 index points increase to the level cumulatively by 2000, with annual changes being smaller. The crude effect on GDP(O) level might therefore be in the order of 0.1 per cent cumulatively by 2000, with the effect on annual growths being very small. Note that the published estimates of GDP reflect the impact of PPIs on constant price expenditure components as well as output. Therefore the effect on GDP will not necessarily be the same as that for GDP(O). 6.4 It should also be noted that the accompanying article by Prabhat Vaze examines in some detail the sensitivity of National Accounts aggregates to changes in deflators for computers and also telecommunication equipment and electronic components. The article demonstrates at the aggregate level the effects of various assumptions and approaches including the use of US deflators to test sensitivity. 7 Further work 7.1 The changes made to the historical series for this index represent a major improvement and are a very positive outcome of the STOIR report, the first of the National Statistics quality reviews. Nevertheless, this has highlighted the difficulty in obtaining reliable data in fast changing industries and the statistical problems that can arise when these industries are dominated by a few key manufacturers.

6 7.2 ONS has therefore determined that more resources should be dedicated to working with such key contributors and two field officers are to be appointed to take this work forward. ONS will also be looking at some other difficult industries, where there is a significant domestic production, on a rolling basis. 7.3 The work performed has also highlighted issues regarding the publishability of very detailed six-digit indices. However, ONS is expecting shortly to move to a new method of statistical estimation for the PPI (see December 1998 Economic Trends article) which will enable for the first time the calculation of sampling errors. This will provide an important illustration regarding the quality, from a sampling perspective, of such disaggregate information. 7.4 In terms of quality adjustment research, ONS is currently engaged in examining hedonic methods for computers and some other key products. This research is being conducted jointly for retail and producer prices. The results will be compared with existing methods. If research and testing confirm that hedonic modelling is the most appropriate way forward, then ONS would look to adopt this in a European context, to maintain consistency with other countries National Accounts. ONS will therefore be working closely with the new European Hedonics Centre set up by Eurostat this year. 8 Summary 8.1 As a follow up to the Short Term Output Indicators Report, ONS has examined the quality of the detailed six-digit index for PCs and laptops. Working with one or two key home producers, changes have been made to the historical quotes provided to ONS. This has led to a major revision to the six-digit index. A special one-off procedure for quality adjustment has been adopted for the new historical quotes. 8.2 The results show a new index which is more consistent with other evidence in particular the flatness of the old index during the last two years is no longer apparent. The revised index is more similar to the UK HICP and far closer to the US PPI. 8.3 The impact of the revision to the six-digit index is small in terms of its effect on the overall PPI. The impact on the National Accounts will also be small and will be incorporated within the more general changes made in September, with the publication of the 2001 Blue Book. The accompanying article by Prabhat Vaze explores, as a sensitivity analysis, the effect of different deflators on the National Accounts. For further information please contact the author: e.mail: martin.brand@ons.gov.uk tel: