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Producer Price Indexes

## PPI Introduces Hedonic Quality Adjustment for Internet Access Indexes

Effective with the release of Producer Price Index (PPI) data for December 2016, on January 13, 2017, the Bureau of Labor Statistics began using hedonic quality adjustment for broadband items within PPI data for Internet access services:

Broadband Internet access services include digital subscriber lines (DSL), cable, and fiber optic services. These services are subject to rapid technological change because download and upload speeds typically increase over time. This means specific items within the broadband internet access sample of the PPI periodically are replaced with items with faster download and upload speeds.

To account for these changes, we must determine the value of quality adjustment (VQA)—the value of the increased broadband download or upload speed. Ideally, PPI survey participants would provide this information, but often this does not occur. As a result, we use a hedonic model to estimate the value of the increased speed. The regression formula used in the hedonic model is based on Equation 1, and the results for 2016 are shown in Table 1.

### Equation 1

Log Pit = α0 + β2 (Log X2i) + β3 (Log X3i) … (βk Log Xki) + υi

Where:
Log Pit  is the Log price of the i th model in period t
α0  is the intercept
Log Xi  are the logged variables representing observed product characteristics
β2 … βk  are the regression/slope coefficients
υi  is the residual or error term

### Table 1. PPI Hedonic Model Regression results for broadband internet access for 2016 a,b,c

Coefficient Standard Error t-statistic P-value Variance
Inflation Factor

(Intercept)

2.8844 0.3072 9.390 0.000 -

0.3075 0.0977 3.147 0.005 23.6840

Residential

0.0320 0.3352 0.095 0.925 86.0865

Company A

0.5906 0.1025 5.762 0.000 4.9199

Company B

0.7529 0.1539 4.892 0.000 18.3561

Company C

0.7068 0.1551 4.557 0.000 5.1195

0.1411 0.1096 1.287 0.213 50.5616

-0.8863 0.1684 -5.263 0.000 16.9078

(a) Adjusted R-Squared = 0.9400; F = 59.17; Root Mean Squared Error = 0.0933
(b) Base Configuration: Business; Several Companies
(c) Dependent variable: Log Price