One of the main objectives of the producer price index (PPI) is to serve as an aggregation price index that appropriately represents the overall supply-demand condition regarding goods and services in an economy as a whole. In this respect, the current system of Japan's PPI system is confronted with the following two challenges: (i) overall inflationary pressures in the entire economy cannot be tracked because the indexes for goods and services are separately constructed and published; and (ii) the effects of price changes in upstream stages in the production flow are exaggerated because the PPI is aggregated as the "all commodities index" in which prices of commodities in different demand stages are aggregated through weight-averaging by gross trade value. In order to overcome those challenges, we construct a price index of Final Demand-Intermediate Demand aggregation system of Japan's PPI (the FD-ID price index) by assigning commodity-level Japanese PPI indexes for goods and services to the stage of final demand and the four stages of intermediate demand, in an optimal manner in accordance with the production flow in the Input-Output table and by aggregating the indexes in a way that eliminates multiple counting. The use of the FD-ID price index makes it possible to measure inflationary pressures in the entire Japanese economy, including both goods and services sectors. It also becomes possible to track the process of price changes being transmitted from upstream to downstream stages in the production flow across the sectors of goods and services. This study provides detailed explanations of the methodology for constructing the Japanese FD-ID price index and the characteristics of the constructed index.
Keywords: Producer price index; FD-ID aggregation system; Input-Output table; Multiple counting problem
Views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Japan or Institute for Monetary and Economic Studies.