Auditing the Producer Price Index: Micro Evidence from Prescription Pharmaceutical Preparations

From January 1984 through December 1989, the Bureau of Labor Statistics (BLS) price index for prescription pharmaceuticals grew at 9.09% per year. Using BLS-type Laspeyres index procedures with monthly price and quantity data on all prescription pharmaceuticals sold by four U.S. pharmaceutical manufacturers accounting for 24% of industry domestic sales, we find that the four-company index increases at 6.68% per year. When we employ a Divisia price index with smoothed weights incorporating new goods, the index grows 6.03% per year. Why does the BLS index grow 50% more rapidly than the Divisia index? That mystery is the focal point of our article.