Price Escalation
Most price analysis that you will perform involves historical procurement quantity and pricing data. The historical procurements will likely span a considerable period of time. The economy may have experienced inflation or deflation or both during that period of time. A method of adjusting historical pricing becomes necessary to eliminate the effects of economic change. Many indexes are published that quantify change in the economy. For the purpose of measuring procurement pricing change, the Producer Price Index is the most fit.
The Producer Price Indexes (PPI) measure average changes in prices received by domestic producers of commodities in all stages of processing. Producer Price Indexes are based on selling prices reported by establishments of all sizes selected by probability sampling, with the probability of selection proportionate to size. Individual items and transaction terms from these firms are also chosen by probability proportionate to size. The Indexes are compiled by the Bureau of Labor Statistics.
To meaningfully use price indices, the movement of the index from one period to another must be expressed as a percent change. The following formula is used to determine the percent change.
(CURRENT INDEX - BASE INDEX) X 100
________________________________________________ = PERCENT CHANGE
BASE INDEX
To determine a future value from a historical value and a future index the following ratio is used.
HISTORICAL VALUE X FUTURE INDEX
___________________________________________ = FUTURE VALUE
HISTORICAL INDEX
The Producer Price Indexes (PPI) are published by the Bureau of Labor Statistics.