ONS Price Indices - User Guide - Office for National Statistics
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1. and then proceeding just as described above ONS Price Indices User Guide b Index points Relatively few indexation clauses which rely on index data adjust contract prices on the basis of changes in index points When prices are adjusted by a percentage on the basis of a change in index points the value of an index point will fall in percentage terms as the index level rises and vice versa For example an increase of 1 index point from 205 5 to 206 5 represents an upward movement of only 0 5 per cent Conversely a 0 9 increase in an index of 205 5 would raise the index 1 8 points to 207 3 Therefore if the base price is adjusted by a pound amount according to a change of index points the procedure is then vulnerable to changes in the index base period Index point s values would differ for an index rebased to a later year In contrast adjusting a base price by a percentage change in an index as in approaches a and b above will not result in these discrepancies Adjustment clauses using the CPI CPIH RPI or RPIJ usually involve changing the base period payment by the percentage change in the level of the CPI CPIH RPI or RPIJ between the base period and a subsequent time period This is calculated by determining first the change between the two periods and then the percentage change The example below illustrates the computation of the percentage change CPI for current period 136 0 CPI for base period 129 9 First2. for a 5 rise in the finished goods price index as shown below Base price 1 000 Plus 5 0 times 7 35 00 Equals adjusted price 1 035 d Composite indices Some contracts describe construction of a composite index based on several indices The advantage of a composite index is that it may more accurately identify the appropriate change for a base price since it will refer to several of the costs involved in producing the product or service in question However a composite index entails more calculations at the time of adjustment than the simpler procedures described earlier One procedure for specifying a composite index is illustrated by the following steps i Choose the indices that will represent the different costs involved such as a fuels index a machinery index or whatever else is appropriate ii Choose the appropriate weights for these indices in accordance with the proportion of the production budget which may be devoted to these various categories The list of chosen weights should sum to 100 iii Clearly specify the time period that these relative weights are supposed to represent The weights should be chosen to represent the time period associated with the base price This will be referred to as the base period iv The first step necessary for the calculation of the composite index is to rebase all of the original index data to the contract s base period This is done for each series by dividing the indi
3. index published in the 2010 100 series and then calculate a linking factor as follows 2005 100 index for June 2013 divide by Nearest equivalent 2010 100 index for June 2013 Then simply multiply the 2010 100 index after June 2013 by this linking factor to extend the 2005 100 time series For example 7200700000 JVZ7 as published in the Business Monitor for Producer Price Indices for September 2014 April May June 2005 100 129 9 129 8 129 9 2010 100 112 3 112 5 111 4 The factor is calculated as 129 9 112 3 1 156 and figures for the 2005 100 extended series are calculated as follows May 112 5 1 156 130 0 June 111 4 1 156 128 8 This example can be applied to any future re linking rebasing for example 2005 100 back to a 2000 100 basis An alternative approach that may be adopted is to extend the newer index series backwards rather than extending the older index series forwards This methodology is also statistically sound and the calculation is very similar to the above example The difference is that the 2010 100 series is divided by the 2005 100 series to obtain the linking factor in the above example this would be ONS Price Indices User Guide 0 928 The 2005 100 values are then multiplied by this linking factor in order to extend the 2010 100 series backwards This method can be more practical for contracts as the linking exercise only needs to be carried out once Re referencing the CPI When the harm
4. products and services are categorised within industries and CPI use a similar classification called Classification of Individual Consumption by Purpose COICOP which links the outlets and items both classifications are available on the ONS website 8 Specify that calculations of price adjustments shall always use the latest version of the index data published as of the date specified for such calculations this requires that contracting parties explicitly agree on the date the price adjustment calculations are to be made Adherence to this principle and its implications should prevent many potential problems Contracts that fail to incorporate this guideline will instead need to specify which version of the index data should be used because a ONS routinely revises data for certain surveys within a specific spectrum time frame after initial publication b data are rebased PPI SPPI or chain linked CPI c reclassification may be carried out and d on rare occasions data may be corrected PPI SPPI revision policy Link to be added and CPI revision policy are available on the ONS website Among other advantages following guideline 8 PPI and SPPI should resolve any ambiguities arising due to the fact that all index data are routinely subject to revision to reflect late reports and corrections by respondents in the surveys Revisions are usually small at the higher levels of index aggregation but often are relatively large for detail
5. seasonal price movements from their adjustment calculations 6 State the frequency of price adjustment The indexation clause should specify whether price adjustments are to be made at fixed intervals such as monthly quarterly semi annually or annually or only at the expiration of the contract To conform to the procedure described in guideline 10 price adjustments have to be calculated over an interval whose beginning point is the contract s base period This is the time period associated with the chosen base price for a discussion of base price see guideline 2 Difficulties maybe encountered with those contracts which do not designate a specific frequency for price adjustment but rather state that the latest data available as of a certain date should be used for adjustment In this case or for any other case that does not cite a specific time interval problems will arise unless the designated procedure corresponds with the version of the data to be used and the date on which the price adjustments will be made Avoid wording such as the index for aluminium mill shapes as of September 30 since several different and equally plausible interpretations are possible for such language It could mean the index that was available on September 30 which would be the August figure it could mean the September index or it could mean the October index since the September index would be based on information supplied to ONS before September
6. the conceptual coverage of Household Final Monetary Consumption Expenditure HFMCE is the starting point for defining which expenditures in principle should be included in the CPI This is because COICOP and HFMCE define which transactions constitute household final monetary consumption as opposed to other flows such as taxes other transfers or capital and financial transactions Again ONS do not advise any users which index to use in contract negotiations and this is purely a decision to be made between the customer and supplier The ONS can only provide advice on what the index is trying to measure and supplementary guidance when changes occur Last Modified Date March 2015
7. 30 7 Provide for missing or discontinued data Occasionally any given index may be unavailable for a particular time period usually because price information was not supplied by a sufficient number of survey respondents to meet ONS high publication standards Highly detailed indices are more susceptible to this problem than indices for broader groupings Wherever possible and where other factors are not more important using a broader grouping will reduce this risk Indexation clauses should provide procedures to be used when required data are missing Sometimes an index is permanently discontinued when a commodity declines in market importance this most commonly occurs as a result of periodic re sampling by ONS Indexation clauses may ONS Price Indices User Guide provide for successor indices if the original indices are discontinued or for contracting parties to renegotiate a successor index A default provision that calls for using the next higher level series might be included in the contract Note that if ONS merely changes the title or recodes an index it is considered to be the same series and therefore presumably should not necessitate any contract renegotiation ONS publish documentation on methodology used for the Producer Price Indices Services Producer Price Index and the Consumer Price Indices which can be found on the ONS website There is a standard industrial classification SIC used for PPI and SPPI under which all
8. Guidance on using indices in Indexation Clauses Office for National Statistics 2015 Edition ONS Price Indices User Guide GUIDE TO USING THE ONS PRICE INDEX IN CONTRACTS The Office for National Statistics ONS price indices provides summary measures of the movements in various categories of prices over time They are published primarily for use in Government economic analysis The ONS Price Indices are also used in contracts by businesses and government to adjust payments and or charges to take account of changes in categories of prices Indexation Clauses also known as Escalation Clauses A list of users and how they use indices is available on the ONS website Producer Price Index Consumer Price Index Services Producer Price Index This paper sets out a range of issues that should be taken into account by parties considering including an Indexation Clause in a contract using an ONS published Index THE ROLE OF THE ONS IN RESPECT OF INDEXATION CLAUSES Although the ONS acknowledges that the various price indices it publishes are used by businesses and government to adjust payments and or charges it neither encourages nor discourages the use of price adjustment measures in contractual agreements However ONS is aware many users use indexation to adjust contracts For this reason this guidance has been produced to help ensure the arrangements are compatible with the ONS publications policy which is available from the ONS M
9. ces by the index value for the base period and then multiplying the result by 100 For this and following steps note the detailed example at the end of this report v Then derive values for the composite index by multiplying the relative weights by the rebased index values for each index series and summing the results This calculation must be done for each month or other time period needed for determining the current adjustment vi Using the composite index values created in step v calculate the current adjustment in standard fashion that is by using the procedure described in a e Limits for price adjustment ONS Price Indices User Guide Indexation clauses sometimes contain a floor a ceiling or both to limit the total price adjustment during the life of the contract If the upper or lower limit is reached the parties may renegotiate prices for the duration of the contract Some contracts specify that no price adjustments are to be made until a minimum change in the selected index has taken place Contracts may also provide that an indexation is to apply in both an upward and downward direction or in one direction only 11 Other considerations a Allow for negative price movements Any potential variations from the recorded price movements should be explicitly set out For example in some Indexation Clauses there is no change in the contract price in a period in which there is a fall in the price index being u
10. dices ONS is now strongly discouraging such language in indexation contracts in accordance with guideline 8 recommending that the latest available version of index data be used In addition ONS does not maintain records for originally published indices As a result no official rebased versions of such originally published indices exist 10 Define the mechanics of price adjustment a Simple percentage method One method of price adjustment is to have the base price changed by the same percentage as that calculated for the selected index To illustrate suppose that the contract indexation clause refers to Manufacture of Textiles amp Textile products index 6107131400 and code K5VT as published in the PPI Statistical Bulletin Also suppose that the index was 110 0 when the base price was set A year later when the first adjustment is made the figure is 115 5 This represents an increase of 5 0 in the Manufacture of Textiles amp Textile products index 6107131400 and code K5VT as published in the PPI Statistical Bulletin as shown below Index at time of calculation 115 5 Divided by index at time base price was set 110 0 Equals 1 050 This means that the base price should be increased by 5 0 To proceed Base price 1 000 Multiplied by 1 050 Equals adjusted price 1 050 In later years this procedure would be applied again by taking the current index value and dividing by the index value at the time the base price was set
11. e That is what should not be written into the contract is language such as the following Divide the current index value by 103 9 which is the value of the index for the base period January 1990 and then Rather the following is preferable Divide the current index value by the index value for January 1990 which represents the base period and then Contract clauses that incorporate specific index values will become problematic when the reference base is later changed by ONS the index value incorporated into the contract will be incompatible with current official data after ONS has implemented the rebasing or chain linking 9 Avoid locking indices used for indexation into any particular reference base period Contracting parties should simply follow the principle of guideline 10 by calculating percentage changes using indices expressed on the reference base period in effect when the contract indexation is carried out In general relying upon a new index reference base period as set by ONS should not affect calculations except for rounding differences as long as all percentage changes are derived solely from indices expressed on the official base period Because rounding may indeed make a substantial difference when the pound amount of a contract is very large it will be doubly important for such contracts to rely only upon official data on the current base as determined by ONS Official data for current ti
12. ed indices The version of any index published off spectrum after its initial publication is considered final and may not change again barring corrections chain linking and rebasing It is not appropriate to refer to the first published PPI and SPPI version of an index as preliminary and neither the first published nor the final version of an index should be labelled actual a term that might mean different things to different contracting parties and which has no official meaning in Prices terminology It is not appropriate to refer to the published CPI RPI version of an index as provisional as CPI very rarely revise data and RPI data is not revised therefore any publication is considered final and will not change again barring corrections or chain linking To follow guideline 8 effectively it is essential to specify the date on which the price adjustment is to be made Currently PPI and CPI data are usually published every month following the reference month in question and SPPI every quarter depending on which publication they appear in publication dates are available on the GOV UK Thus the earliest day for price adjustment that a contract ought to specify needs to be after the publication day of the month following the designated data month The contracting parties selection of the date on which the price adjustment is to be made should be made only after they have agreed on first the reference month and second on whether th
13. edia Relations Office email media relations ons gsi gov uk The decision to employ an indexation mechanism as well as the choice of the most suitable index is up to the parties involved It should be noted that other government departments may have their own policies on the use of price indices which may differ in some aspects from the guidance in this document When drafting the terms of an indexation provision for use in a contract to adjust future payments both legal and statistical questions can arise The ONS cannot help in relation to legal questions in particular it cannot draft specific wording for contracts nor mediate interpretative or other legal disputes which may arise between the parties to an agreement On statistical questions the ONS can provide basic assistance and certain general guidance is set out in the following paragraphs However this assistance and guidance is provided without acceptance of any responsibility by the ONS Users should form their own independent assessment in relation to the index and its use in specific cases and should seek such professional advice as they consider appropriate Users are advised to take account of the relative levels of accuracy of the relevant indices DISCLAIMER This paper is intended to summarise information about the various price indices currently published by the ONS and some of the issues which should be considered by persons in deciding to use such price indices in Indexati
14. eir calculations are to be based upon the first published version or the final version of that month s index The date for calculating the price adjustment can then be selected so that the desired data will be available ONS Price Indices User Guide It is vital to address these matters before a contract is ready for signature Otherwise disagreements may arise when the first published and final versions of the selected index are different and there will be no criterion for selecting either version If contracting parties do not specify an exact date for making price adjustments the contract should at least specify whether first published or final data should be used for calculations If this is the case the final version of the data should be specified whenever feasible because only final data will be rebased chain linked retroactively whenever ONS may update the index reference base Any procedure that departs from guideline 8 by failing to specify the version of the data or the date when the price adjustment is to be made needs to be constructed so that it will be in harmony with the frequency of price adjustment as specified elsewhere in the contract This is discussed in guideline 6 1 Spectrum relates to the Producer Price time frame used by ONS to revise data i e five months for PPI and five quarters for SPPI A contract should not refer to an index value associated with a base price but instead to its month and year alon
15. ex program or if it should become temporarily unavailable e Locking index into a specific base period Using ambiguous terms For example referring to actual indices For more guidance on pitfalls to avoid please refer to the section on guidelines for developing indexation clauses ONS Price Indices User Guide RELINKING REBASING The Producer Prices and Services Producer Prices are series of base weighted indices resting on the basket of goods concept and regular five yearly rebasing is carried out in order to reflect the changing pattern of industry s sales and purchases in the index weights currently the PPI and SPPI are rebased on 2010 100 in October 2013 When the PPI and SPPI were rebased to 2010 100 the following instructions were given when users wanted to switch to an index with a base of 2010 100 from its former base of 2005 100 This means that the fixed weights used to combine product indices into broader aggregates will reflect the pattern of transactions in 2010 rather than 2005 To convert 2010 100 indices SIC 2007 only back onto a 2005 100 basis Please note These instructions are only for prices indices on the same Standard Industrial Classification For those who are using the 2005 100 indices in long term contracts and wish to extend the series beyond August 2013 the latest month for which 2005 100 figures were published the following approach may be suitable First select the nearest equivalent
16. figure less second figure equals change 6 1 Divided by previous period CPI 129 9 Equals 0 047 Result multiplied by 100 0 047 x 100 Equals percentage change 4 7 c Indexation of a portion of the base price Another procedure sometimes employed changes the base price so that only part of it is escalated by a selected index while the balance remains fixed To illustrate suppose that an item has a base price of 1 000 of which 700 is to be escalated by the index while the other 300 remains unchanged i e only 70 of the base price needs to be escalated using a price index As for the simple percentage method Index at time of calculation 115 5 Divided by index at time base price was set 110 0 Equals 1 050 Base price 1 000 Variable element of base price 700 Multiplied by 1 050 Equals adjusted variable element of price 735 Plus fixed element of base price 300 Equals 1 035 ONS Price Indices User Guide Alternatively this may be done by changing the base price by a certain pound amount for each 1 movement in the selected index To determine the certain pound amount that is needed for citation in the contract simply divide the designated variable portion of the base price 700 by 100 which in this case would yield 7 The indexation clause is written so that it provides that the base price of 1 000 shall change 7 for each 1 movement in the index Using this approach the base price would rise to 1 035
17. ified as precisely as possible 2 Establish the base selling price subject to indexation State whether the base price refers to a per unit quantity or a certain volume of units Give the effective month or year of this base selling price this time period is often called the base period Indicate the length of time it will remain in effect 3 Select an appropriate index or indices The available ONS price indices for selection are Consumer Price CPI Producer Price PPI and Services Producer Price SPPI The index or indices selected will affect the price change recorded and should be chosen carefully to best represent the item subject to indexation and the intention of the parties While very detailed indices at the lower level might reflect a particular activity they will be based on smaller datasets and will be subject to change and be more volatile 4 Clearly identify the selected index and cite an appropriate source The indexation clause of a contract should identify the index selected by its complete title index number and any identifying code s Please note the term Price Index refers to a family of indices compiled by the Office for National Statistics A specific index should be cited in the contract by referring to the Producer Price Index nu for the Services Producer Price Index for or the Consumer Price Index for followed by the exact title and any identifying code or number The clause should als
18. me periods are not available on previous reference bases after a base change has been implemented by ONS Further as a general rule estimating a conversion of data to an old base for the purpose of contractual price adjustment is inadvisable because such a method could well be challenged for referencing something other than official government data ONS Price Indices User Guide Rebasing is carried out for PPI and SPPI every five years whereby the weights are updated to the new base year and the index is re referenced so that the index values are equal to 100 in the new base year Rebasing factors are only made available by ONS to convert data on the current standard reference base period to the immediately preceding one as long as both base periods are on the same Standard Industrial Classification this is discussed later in this guidance note CPI however is not rebased but is chain linked with the weights updated annually and the resulting annual indices chained together to produce a continuous time series The index is re referenced occasionally but not on a routine basis Re referencing of an index is not considered revising because the relative movements of any series over time are not affected Users must recognize that the absolute level of any index has no intrinsic meaning other than relating a measurement to the base year which is itself arbitrary to a degree Older contracts may already specify use of originally published in
19. o cite an appropriate source for the index selected The primary official ONS source of index data can be found on the ONS website as Statistical Bulletins Contracting parties should not cite table numbers and or table titles in their indexation contracts because they are subject to change ONS sources are preferable to secondary sources such as other government publications or private firms If contracting parties agree to accept updated index values ONS Price Indices User Guide on the telephone from ONS staff members the indexation clause should specify appropriate procedures and whether subsequent verification from a published source is necessary Example the Producer Price Index for Textiles index number 7112130000 identifying code K37R as published in the Producer Price Index Statistical Bulletin Example the Services Producer Price Index for Rail freight index number 4921000000 identifying code K8R2 as published in the Services Producer Price Index Statistical Bulletin Example the Consumer Price Index for Health identifying code CHZW as published in the Consumer Price Index Statistical Bulletin 5 Specify whether seasonally adjusted indices or unadjusted indices are to be used In general seasonally adjusted indices are not appropriate in indexation agreements Because price adjustment clauses usually are intended to capture actual price changes contracting parties normally would not want to remove
20. on Clauses It is a brief description only and is not a comprehensive or exhaustive description of price indices or of the issues which should be considered by persons in ONS Price Indices User Guide deciding to use price indices or Indexation Clauses Neither the ONS the UK Statistical Authority nor their employees advisers or agents will in any way be liable to any person or body for any cost expense loss claim or damage of any nature arising in any way out of or in connection with the statements opinions or other representations actual or implied contained in or omitted from this paper or by reason of any reliance thereon by any person or body This paper is not business investment legal or tax advice and persons should seek their own independent professional advice in respect of all matters in connection with the use of indices published by the ONS and their use in Indexation Clauses No representation or assurance is given that any ONS published indices are accurate without error or appropriate for use by persons or that the ONS will continue to publish any of the price indices publish them at a particular time or that the methodologies for their determination will not be changed or that they will be suitable for use in any Indexation Clauses GUIDELINES FOR DEVELOPING INDEXATION CLAUSES 1 Define clearly the payment that is subject to review in line with the index The item whose price is subject to indexation should be spec
21. onised index of consumer prices HICP was launched it was referenced on 1996 100 Starting with the publication of the January 2006 index it has been referenced on 2005 100 The change of reference period was accompanied by a full re referencing of all HICP indices back to 1996 This resulted in widespread revisions to 1 month and 12 month rates of change This is because the 1996 based rates of change are calculated from indices rounded to one decimal place and are therefore subject to rounding errors This is not the case for the 2005 based rates of change which are calculated from indices rounded to six decimal places and therefore there will be no widespread revisions in future re referencing exercises Estimates which are broadly consistent with the data from 1996 are also available back to 1988 along with indicative figures for the period 1975 1987 but these data should be treated with some caution O Donoghue J 2004 Harmonised Index of consumer prices historical estimates provides more details More recently ONS has produced a modelled back series for the CPI covering the period 1950 2011 Again these are indicative modelled figures which should be treated with some caution O Neill R and Ralph J 2013 Modelling a Back Series for the Consumer Price Index provides more details CHAIN LINKING Chain linking is carried out on an annual basis and is a term used to describe a range of consecutive activities that update
22. sed for indexation In some cases there will be a catch up once the index rises again b Major revisions to the index structure Provide a built in method for handling situations that may arise because of major revisions to the structure of the index rebasing or reclassification for example c Decimal places If reference is made to the annual percentage change in an index ensure that the number of decimal places to be used in the calculation is mentioned preferably one decimal place It is better to refer to the annual percentage change in the index as published by the ONS rather than attempt a calculation oneself as PPI and SPPI calculate percentage changes from rounded index values and then round these percentage changes as well whereas CPI calculates from unrounded d ONS name change Reference should be made to the possibility that the ONS may change its name at some point in the future or the index may even be published by another Government department The words ONS or any successor Government department may be used PITFALLS TO AVOID e Vague citation of the Price Index rather than a reference to a specific index by its title and any identifying code number e Use of unofficial estimates derived from rebasing factors rather than relying upon official ONS data e Ambiguous reference to dates index as of May 30 e Lack of a provision for a successor index should the designated index be dropped from the ind
23. the consumer price indices basket of goods and link the new index series directly to the previous series thereby preserving the long term time series Therefore it s the joining together of two indices which are overlapping in one period by rescaling one of them to make its value equal to the other one in the same period which combines them into a single time series More information on user guidance methodology and developments is available in the Guidance and Methodology area of the ONS website STANDARD INDUSTRIAL CLASSIFICATION CHANGES SIC AND CLASSIFICATION OF INDIVIDUAL CONSUMPTION BY PURPOSE Since 1948 the United Kingdom Standard Industrial Classification of All Economic Activities UK SIC has been revised seven times 1958 1968 1980 1992 1997 2003 and 2007 These reclassifications are motivated by the need to adapt the classifications to changes in the world economy In essence the introduction of a change in classification change reflects the growing importance of service activities in the economy of the last 15 years and in particular the developments in information and communication technologies We have generally advised that where there are fundamental differences to the index structures due to the SIC 2007 reclassification project then trying to link on isn t advisable whether it be using one month or several This is because the growth rates and index levels of the two series can be vastly ONS Price Indices User G
24. uide different Due to the fundamental changes of Input prices due to a reclassification project the new indices will provide you with the most up to date price measure There is generally a lot more correlation in the old and new SIC structures especially in certain industries so linking on can be fairly sensible However we do not advise any users which index to use in contract negotiations and this is purely a decision to be made between the customer and supplier The ONS can only provide advice on what the index is trying to measure and supplementary guidance when large scale changes occur e g Rebasing The ONS has provided lengthy time series of reclassified indices for users where we have the detailed price information so if people are drawing up new contracts then the correct and only advice would be to use the new indices for reasons mentioned above but also for the simple fact that the old index no longer exists The linking rebasing advice given above is purely for rebasing purposes which is in principle a lot more straightforward and it is not advisable to use for reclassification changes but it is entirely up to the users to decide this The coverage and classification of the CPI item indices are based on the international classification system for household consumption expenditures known as COICOP classification of individual consumption by purpose Founded on National Accounts principles the COICOP system along with
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