PPI CATEGORY CHANGES AND PPI CATEGORY MAINTENANCE:
The CPI Table 3 categories published by the BLS rarely change; the last significant change was made in 1998. There are only about 200 CPI commodity categories and indexes are published every month for these categories without exception.
The same is not true of the PPI Table 6 categories. The PPI Table 6 categories the Bureau of Labor Statistics publishes indexes for change twice a year making it difficult to maintain an official "list" of valid PPI categories that FIFO inventory balances should be assigned to for IPIC method LIFO calculations. In January and July, the BLS publishes a list of categories for which indexes will no longer be published. There are usually about 100 categories (of a total of about 2,000) discontinued each year. There were over 500 categories discontinued after December 2003 but this was an abnormally high number that coincided with the implementation of the new NAICS industry codes.
Categories are discontinued as the related products become obsolete. Many changes are also made because the BLS changes the organization of categories for a type of product. An example of this are changes in lumber categories from tree species identification (fir, pine and other) to stage of finishing (edge worked v. not edge worked). Another example is a change in soft drinks categories from flavors (cola, root beer, etc.) to bottling type (bottles v. can).
New categories are added because of new products being marketed or new variations of existing products. The number of new categories has been less than the number discontinued in recent years.
The BLS occasionally changes the category codes for existing products. For example, as of June, 1999, the BLS discontinued use of the 067506 and 067507 series of categories because the goods encompassed by them were reassigned to a new 067514 series.
Another challenge of working with PPI Table 6 categories is what we call "seasonally published" categories. This occurs often for products such as produce. There are also categories we describe as "sporadically published" which are categories for which the volume of transactions sampled is small enough that not enough price survey responses are returned to the BLS to constitute a valid sample. It is common for such categories to be officially discontinued eventually if indexes cannot be published on a regular basis.
For companies using the 10 percent method, there is also a problem of PPI indexes being published for a category but the category is so obscure that the BLS Weight is .000 which means the weight is less than .0005.
Assignment of FIFO inventory balances to discontinued PPI categories or categories with missing indexes presents a problem for IPIC calculations, especially when the 10 percent method is not used (an alternative available now under the 2002 IRS LIFO Regulations) because missing indexes are more common for PPI most detailed categories.
IRS REGS. REQUIREMENTS FOR MISSING PPI INDEXES:
The IRS IPIC method Regs. revised in 2002 address both situations for which PPI indexes are not available:
Index not published but category not discontinued - IRS Reg. § 1.472-8(e)(3)(iii)(D)(2) addresses this. This section reads “If a BLS price index for a most-detailed or 10 percent BLS category is not otherwise available for the appropriate or representative month (but not because the BLS categories in the BLS table have been revised), the taxpayer must use the BLS price index for the next most-detailed BLS category that includes the specific item(s) in the most-detailed or 10 percent BLS category.” We refer to this treatment as the "Substitute Index Method". This is how our LIFO-PRO software handles these situations.
Index not published because category was discontinued - Reg. § 1.472-8(e)(3)(iii)(D)(4) states that "...If the BLS has revised the applicable BLS table for a taxable year, a taxpayer must compute the category inflation index for each BLS category for which the taxpayer cannot compute a category inflation index in accordance with paragraph (e)(3)(iii)(D)(3) of this section (affected BLS category) using a reasonable method, provided the method is used consistently for all affected BLS categories within a particular taxable year." This Reg. paragraph goes on to say "The compound category inflation index described in paragraph (e)(3)(iii)(D)(4)(ii) of this section is a reasonable method of computing the category inflation index for an affected BLS category.” The Compound Inflation method entails the multiplication of partial year inflation rates for both the discontinued and replacement categories.
We believe the Substitute Index method is a reasonable method of handling discontinued categories. The Substitute Index method is more practical because it is simpler and should not produce indexes that are substantially different from those calculated using the Compound Inflation method in most cases.
REASSIGNMENT OF INVENTORY BALANCES FOR DISCONTINUED CATEGORIES:
When PPI categories are discontinued, FIFO inventory balances need to be reassigned from discontinued categories to appropriate replacement categories. This may not solve the problem of missing indexes for calculations in the year for which a category is discontinued. For example, the 15950301 Black graphite pencils category was discontinued after December, 2001. A new category, 15950304 Nonmechanical pencils, crayons and chalk was introduced in December, 2001. If an index calculation is made for a December, 2002 year end and December is also the Appropriate index month, FIFO inventory values can be assigned to 15950304 and indexes will be available for both December 2001 and 2002. If a November Appropriate index month (or any month other than December) is used, there will be a November 2002 index published for 15950304 but not for November 2001 and there will be a November 2001 index published for 15950301 but not for November 2002. The alternatives for dealing with missing indexes are the Compound Inflation or Substitute Index methods described above or other reasonable method.
Our LIFO-PRO software automatically makes reassignments of inventory balances assigned to PPI categories that have been discontinued in the first period for which the new category can be used (indexes for the new category have been published for both the current and prior year Appropriate index months). The inventory reassignments are to appropriate replacement categories that we have determined.
The software also alerts users to the fact that such a reassignment will be made the following year for a discontinued category. In both cases, a report is generated explaining these actual and future reassignments. While it is far more common for there to be a single appropriate replacement category for more than one category discontinued, in some cases there are more than one possible replacement category for a single discontinued category. An example of this was the changes made after December 2005 when these changes were made in the 0721 Construction products from plastic categories. 07210601 Plumbing products category was discontinued and these three new categories were added: 07210602 Other plastic construction products, 07210603 Plastics pipe and 07210604 Plastics pipe fittings and unions. The LIFO-PRO software alerts users to the fact that there are multiple possible replacement categories if inventory balances have been assigned to a category discontinued for which more than one possible replacement category exists.
While the LIFO-PRO software will automatically make reassignment of categories discontinued that are replaced by a single possible replacement category, users should actually make the appropriate changes for new categories, when making PPI coding assignments at least every other year in case some of the new categories are discontinued.
While the LIFO-PRO software automatically makes replacements for discontinued categories we also provide comprehensive documentation of new, discontinued and reassigned categories which is described below.
LIFO-PRO INFORMATION ABOUT NEW, DISCONTINUED AND REASSIGNED PPI CATEGORIES
We provide a PPI categories maintenance reference tool to our clients that has proven to be very helpful in dealing with changes in PPI categories and has saved countless hours of research. This tool is an Excel file which documents all changes in the PPI Table 6 categories for the past 10 years. This file not only lists the new and discontinued PPI categories but also the appropriate category(s) to be used in place of the discontinued categories. The BLS does not provide information about appropriate replacement categories in the PPI Detailed Reports. The information about appropriate replacement categories is based on our research and consultation with the BLS.
This Excel file documents our review of categories to determine which categories have been discontinued, added or reassigned by the BLS during the past several years. The following describes the contents of the sheets in this file:
Complete List of PPI Categories - This is a list of all PPI categories for which the BLS has published indexes between 1992 and December 2006 including the categories discontinued during that time. This list contains many categories never listed in the PPI Detailed Reports. Many of these are what we call “single category more detailed categories”. An example of this are these categories: 0152 Wool, 015201 Wool and 01520199 Wool. Only 0152 is listed in the PPI Detailed Report. Listing the more detailed categories in this situation would be redundant because their inflation rates are the same and this is why the BLS does not list these. Our standard recommendation to clients is that inventory balances should not be assigned to “single category more detailed categories” because the LIFO-PRO software Reports 23 & 24 are not as lengthy excluding these most detailed categories. The index files used by our software include indexes for all categories.
The BLS Category Number and Names are shown in columns A and B. Columns C-G show the dates indexes were first published or were discontinued and whether indexes were not published for any month in the past year.
Columns H-K show the appropriate replacement categories for categories discontinued by the BLS. Columns L-O show the discontinued categories replaced by new categories. Column P indicates whether a category is a “single category more detailed category” or whether this is the least detailed category associated with a “single category more detailed category”.
Rows with no data in columns A-G represent categories which have multiple categories for columns H-K or L-O data. For example, there are three such rows below the column A row containing 02110111 White pan bread, including frozen because there are four discontinued categories 02110111 replaced which are shown in columns L-O. The row below that containing 026201 Cola, excluding diet cola is blank because there are two new categories replacing the discontinued 026201 category.
New Categories since 2000 - This is a list of the new PPI categories introduced since 2000. Columns C-L show the same information included in the Complete List of PPI Categories sheet columns C-G and L-P.
Categories Discontinued since 2000 - This is a list of the PPI categories discontinued since 2000. Columns C-L show the same information included in the Complete List of PPI Categories sheet columns C-K and P.
Template2007 - This sheet is prepared in a LIFO-PRO software readable format including the necessary column headings, the year end in row 2, and the blank column B to use to enter inventory balances. This sheet includes the same rows included in the Complete List of PPI Categories sheet except those shown in italics. This is the sheet we provide clients to use for purposes of assigning year end inventory balances to PPI categories. Because the BLS adds and discontinues categories every six months,all sheets in this file become superseded in July and January of each year, so it is important to use updated lists of PPI categories.
When PPI categories are discontinued, there is often a new category created at the same time that takes the place of discontinued categories. For example, the 0635 Prescription drugs and 0636 Over-the-counter drugs categories (and the more detailed categories they include) were discontinued in June 2001. The 0638 Pharmaceutical preparations series of categories was introduced in June 2001 to replace the 0635 and 0636 series of categories. This change was made because the BLS believed the new categories better facilitated taking price surveys. This is a common reason for changes of this nature. In some cases, categories are discontinued because products become obsolete and some categories are added because of the creation of new products.
The replacement categories listed in these sheets are those judgmentally assigned by LIFO-PRO, Inc. based on our research and experience. These are not "official" BLS replacement categories. Please contact us if you feel any of the replacement categories we have designated are not proper. We have found BLS personnel to be quite helpful in answering questions about which PPI category is applicable to particular items. The phone number for the PPI analysts at the BLS is 202-691-7705. This file is updated annually.
We make two files available for download at the links below. The file named PPIList2007.xls includes documentation of all changes made through December 2006. This file includes a sheet named Template2007 which includes all PPI Table 6 categories including the categories added starting in December 2006 and excluding those discontinued after that date(there are December 2006 indexes but none for January 2007 and thereafter). This sheet is formatted as required to be read without changes by the LIFO-PRO software. The file named PPIList2006.xls includes documentation of all changes made through December 2004. This file includes a sheet named Template2006 which includes all PPI Table 6 categories including the categories added starting in December 2004 and excluding those discontinued after that date. For companies with a December 2006 year end for which the current year Appropriate index month is December 2006 or earlier, the Template2006 sheet from the PPIList2006.xls should be used so that inventory balances will not be assigned to a category for which indexes are not yet published. If inventory balances are assigned for example to a category discontinued after June 2006 and the current year Appropriate index month is December 2006 or earlier, either the current or prior year Appropriate index month will be missing for the 2006 index calculation, so it won’t matter whether the 2006 or 2007 template is used for the calculation however the 2006 template should be used if inventory balances are also assigned to categories discontinued after December 2006.
Click on this link to download the file named:PPIList2006.xls
Click on this link to download the file named:PPIList2007.xls
A password is required to open these files. Clients and others requesting access to this file should contact us at lifopro@lifopro.com if you don’t already have the required password.
Companies wishing to determine which months’ indexes are published for any PPI Table 6 category can do so by reference to the LIFO-PRO .ppi files available on our Web site and which are automatically downloaded by the LIFO-PRO software. These are text files which may be viewed in Excel or any text editor. This research can also be done by going to the BLS Web page which displays indexes for any category selected for any period for which indexes have been compiled, going back as far as 1913. You can go to that page which they label as Commodity Data by clicking on the following link:
http://data.bls.gov/labjava/outside.jsp?survey=wp
Starting in 2005, the BLS changed the way PPI Table 6 categories are organized. In past years, all PPI categories published whether they were active or discontinued categories were included at this Commodity Data(wp) Web site. The discontinued categories and their index histories are no longer included at that Web site. You can access the page for discontinued categories which they label as Commodity Data-Discontinued Series by clicking on the following link:
http://data.bls.gov/labjava/outside.jsp?survey=wd
The indexes to request at both these sites are the Not Seasonally Adjusted indexes. It should be noted that these indexes may not be the same as the indexes in the .ppi files used by LIFO-PRO since the BLS Web page indexes are "Final" indexes for all but the most recent four months and the .ppi file indexes are "Preliminary" indexes for all periods to facilitate calculations sooner than would be possible using Final indexes. Please contact us if you need preliminary PPI Table 6 indexes for any period since 1991.
CHANGES IN HOW THE LIFO-PRO PROGRAM HANDLES DISCONTINUED AND MISSING PPI INDEXES
As of 2/10/2001, corresponding to LIFO-PRO Version 2.2, the LIFO-PRO software was changed with respect to the way in which missing PPI indexes or BLS weights are treated. In versions prior to 2.2, the index, BLS weights and/or FIFO dollars for these categories were excluded from that pool's index calculation. LIFO-PRO was programmed to make calculations this way because the missing indexes typically occur for some of the more obscure categories in which companies are not as likely to have significant inventory amounts. With 2.2 we changed the software to use substitute indexes instead of excluding these categories. We call this method the "Substitute Index Method". The default setting for LIFO-PRO for versions 2.2 and higher for missing PPI indexes is now to use the indexes (current and prior year) of the next less detailed category which includes the missing index category. For example, if December is the index month and the December 2000 index is present but the December 1999 index is missing for category 02780102, the index used for 02780102 will be the Dec. 2000/Dec. 1999 indexes for 027801. The BLS weight for 02780102 will still be used if required for 10 percent method calculations. The LIFO-PRO IPIC calculation Reports 23 & 24 will include notations explaining which categories are using substitute indexes, which category's indexes are being substituted and which index (current or prior year or both) is missing. LIFO-PRO users will have the option to use the old category exclusion method if they choose (at the bottom of the IPIC Settings screen) but we would not recommend that clients use this. This option is available primarily to provide a means to make past years calculations in the same manner as older versions of LIFO-PRO.
For categories for which the BLS weights are zero (less than .0005), this category will be excluded for 10% Method calculations, as before, because we don't think it would be appropriate to use the greater weight of the next less detailed category.
The process of obtaining the most current months' PPI indexes for the LIFO-PRO software also updates the LIFO-PRO software official list of PPI categories and appropriate replacement categories. The downloading of the most recent month's CPI or PPI index files that LIFO-PRO reads is automated in software versions 3.2 and higher. These files can be manually downloaded from the Downloads web page for earlier software versions or for situations where automatic file downloads from web servers are blocked by a firewall.
Preliminary v. Final PPI Table 6 indexes
The PPI Table 6 indexes published during the third week following a month end are “preliminary” indexes. Four months later, “final” indexes are published. The final indexes include price surveys received after the normal month end cutoff and corrections of errors found after the preliminary indexes are published. The differences between the preliminary and final are typically small. The great majority of taxpayers use preliminary indexes so they can complete their LIFO calculations sooner than if final indexes are used. The fact that there are both preliminary and final PPI indexes published causes some confusion.
The indexes published for table 6 in the PPI Detailed Report in the month they are published are preliminary indexes. These reports also show the final indexes for the index published five months ago. For example, in the March 2007 PPI Detailed Report, the March and February 2007 preliminary indexes are shown but the November 2006 final indexes are also shown because this is the first month for which the final indexes were compiled. These reports also have two columns for percent changes. The March 2007 book shows the percentage change to March 2007 from March 2006 and February 2007. The percent change from March 2006 to March 2007 cannot be used for IPIC method LIFO calculations because this percent is calculated by dividing the March 2007 preliminary indexes by the March 2006 final indexes and the Regs specify that although you can use either of preliminary or final indexes, you must do so consistently.
The paper version of the PPI Detailed Reports are not available until at least a couple of months after the indexes are compiled however these reports are now available online(starting with the June 2005 reports) at http://www.bls.gov/ppi/ppi_dr.htm on the BLS Web site during the third week following a month end.
The BLS maintains a database of all PPI indexes ever published for all periods going back to before the 1920s in some cases. The URLs for the PPI Table 6 categories on the BLS Web site are:
Active categories:
http://data.bls.gov/PDQ/outside.jsp?survey=wp
Discontinued categories:
http://data.bls.gov/PDQ/outside.jsp?survey=wd
The seasonally adjusted check box should be unchecked because the IRS Regs. specify that not seasonally adjusted indexes be used. The indexes displayed from this URL have a (P) note by the latest four months' indexes denoting that these are preliminary indexes. All other indexes displayed are final indexes. The BLS does not make available a database of preliminary PPI table 6 indexes which is not terribly convenient since most IPIC LIFO taxpayers use preliminary indexes. For months before June 2005 when the BLS started making PDF versions of the PPI Detailed Reports available online, the only way to know what the preliminary indexes were if you did not save the preliminary indexes within that four month time frame was by reference to the printed PPI Detailed Reports. Most large public and college libraries have these publications.
LIFO-PRO, Inc. has a database of the preliminary indexes going back to 1992 for all Table 6 categories and the LIFO-PRO software will automatically create an Excel file containing the 5,000 plus PPI categories for each month in this time period. The BLS also makes available a database of PPI table 6 preliminary indexes published for the past 10 or 11 years in text file format at this URL:
ftp://ftp.bls.gov/pub/time.series/wp/wp.data.0.Current
You need to save this file each month to have a complete database of the PPI preliminary indexes because after four months, the indexes in this database are the final PPI table 6 indexes.
