Friday, June 17, 2016

The Origins of the Producer Price Index

When it comes to measuring inflation, the Consumer Price Index gets most of the attention. But while the CPI just celebrated its centenary a couple of years ago, its elders sibling the Producer Price Index is celebrating its 125th anniversary this year. Lana Conforti offers an overview of "The first 50 years of the Producer Price Index: setting inflation expectations for today," in the June 2016 issue of the Monthly Labor Review, which is published by the US Bureau of Labor Statistics. For answers to questions about how the PPI now operates, a useful starting point is the BLS FAQs page on on the PPI

From a modern perspective, the original production of what was then called the Wholesale Price Index looks a little rough-and-ready in  how it defined goods, collected prices, and put together the index. But it meant that people and policymakers from the early 1890s on did have some actual data--not just anecdotes--on major deflationary and inflationary episodes of this time either as they were happening or soon after, including the deflation of the 1890s, the post-World War I inflation, and the deflation of the early 1930s. Here's is Conforti's overview of the origins of the PPI, with more detail about how the methods and approaches of the PPI evolved available at the link (footnotes omitted): 
March 3, 2016, marked the 125th anniversary of the PPI—one of the oldest economic time series compiled by the federal government. The index, known as the Wholesale Price Index (WPI) until 1978, was established as part of a U.S. Senate resolution on March 3, 1891, the last day of the last session of the 51st U.S. Congress. This Congress was famously known as the “Billion-Dollar Congress,” because of its expensive initiatives, such as expanding the Navy and creating pensions for families of military members who served in the Civil War. It operated in an era of industrialization, immigration, and economic growth. Two of its most well-known bills were the Sherman Antitrust Act, which sought to protect consumers from certain anticompetitive business practices that tended to raise prices (e.g., monopolies and cartels), and the McKinley Tariff Act of 1890, which raised duties on imports with the goal of protecting domestic industries from foreign competition. Born out of the necessity to measure the impact of such economic policies, the resolution marking the origin of the PPI read thus:
Resolved, The Committee on Finance be, and they are hereby, authorized and directed, by subcommittee or otherwise, to ascertain in every practicable way, and to report from time to time to the Senate, the effect of the tariff laws upon the imports and exports, the growth, development, production, and prices of agricultural and manufactured articles, at home and abroad…. 
In response to this resolution, Senator Nelson W. Aldrich, who later played a role in the establishment of the Federal Reserve System, authored a report on Retail Prices and Wages in July 1892. According to this report, the demand for price and wage data arose because the lack of reliable data had caused persistent disputes over economic facts. In addition, legislators realized it would be impossible to judge the relative economic progress of the United States and its people without measures of prices and wages. For these reasons, the Senate Committee on Finance made sure to establish a legacy of objective and accurate data:
There was no expectation that the members of the committee would agree about the political or even the economic bearings of the facts ascertained; but all were desirous that hereafter there should be no reason to question the integrity of the facts.
A Bureau of Labor Statistics (BLS) [which had been founded in 1884] committee headed by Dr. Roland Falkner, a statistics professor from the University of Pennsylvania, was tasked with collecting prices and producing the original index data. At the Senate committee’s request, prices were collected from seven main distribution centers across the country:
  • Baltimore
  • Boston
  • Chicago
  • Cincinnati
  • New Orleans
  • New York
  • San Francisco 
Over a 28-month period beginning in mid-1889, BLS obtained 52,393 price quotations for 218 items purchased by wholesalers (commonly referred to as “jobbers” at the time). In a rather informal collection process, experts in the field (today known as field economists) received the following instructions:
As soon as you have completed the collection of wages and prices in [your city], please collect the quotations for wholesale prices….You can change the word “retail” to “wholesale” and make the blank conform. By “wholesale prices” I mean…the prices to jobbers. 
Once collected, these data were compiled by BLS into the first WPI, which was made up of eight equally weighted groupings of products:
  • Food
  • Cloths and clothing
  • Fuel and lighting
  • Metals and implements
  • Lumber and building materials
  • Drugs and chemicals
  • House-furnishing goods
  • Miscellaneous 
The data produced by the BLS committee were published in Senator Aldrich’s 1892 report, which showed that prices fell 0.3 percent from June 1889 to September 1891. After this first publication, in 1893, the Senate committee and BLS completed their initial mission by publishing a report on historical prices for the years 1840–90. This massive compilation was the first of its kind in U.S. history and was made possible only by the dedicated efforts of field economists and with cooperation from the business community.
After several years of planning, in 1900, BLS published Wholesale Prices, 1890 to 1899, the first publication produced without congressional oversight. But it wasn’t until March 1902 that the regular annual publication of Course of Wholesale Prices (hereafter referred to as Wholesale Prices) began.