§1The parts of an index clause
- Series: name it exactly: "Producer Price Index for Wood pallets and pallet containers, series WPU084101, not seasonally adjusted, published by the U.S. Bureau of Labor Statistics."
- Base month: the index month the agreed price corresponds to.
- Review period: monthly or quarterly.
- Band: no change unless the index has moved more than, say, 3% from base.
- Pass-through share: the share of the index change applied to price, since lumber is not all of a pallet's cost.
- Revisions: BLS marks recent months preliminary and can revise them for four months after first publication; say which release you use.
BLS publishes a price adjustment guide for contracting parties with general advice on writing PPI escalation clauses.
§2The formula
If |I_q ÷ I_base − 1| > band: new price = base price × (1 + share × (I_q ÷ I_base − 1)) else: price unchanged
With share = 100% and no band, this reduces to new price = base price × I_now ÷ I_base. The price escalator calculates it from the stored BLS values.
§3Pitfalls
Don't mix series with different base periods: WPU084101 is 1982 = 100, while the industry series PCU321920321920 is December 2003 = 100. Use one series throughout. Don't use a lumber index for a recycled pallet contract without thinking about it: recycled prices follow core supply as well as lumber.
Model wording is in the index escalator clause.
§4Pitfalls
- Revisions: BLS revises recent PPI values. Say in the clause which publication date's values count, so the calculation can be repeated.
- Base month mismatch: the base index must be the month the base price was agreed, not the month the contract was signed.
- Double counting: if the supplier also charges a separate lumber or fuel surcharge, the index already reflects part of that cost.
- Index discontinuation: name a replacement method in case BLS stops or rebases the series.
§5Check the arithmetic
Run the clause against past data before you sign. The escalator shows what a price would have done over the last ten years with your band and share, so both sides can see how often the clause would have triggered.