Producer price inflation, UK: April 2017

• Factory gate prices have grown for 15 consecutive months to April 2017 despite raw material costs being relatively flat since January 2017.

• The monthly rate of inflation for goods leaving the factory gate (output prices) was unchanged at 0.4% in April 2017, while input prices rose 0.1% following 2 months of no growth.

• The annual rate for factory gate price inflation was positive but unchanged at 3.6%, while the annual growth rate for input prices fell back to 16.6% from a peak of 19.9% in January 2017.

• Prices for imported materials and fuels rose 14.9% on the year and were lower than overall input costs for the third month in a row following a strengthening in the value of sterling over recent months.

The factory gate price (output price) is the amount received by UK producers for the goods that they sell to the domestic market. It includes the margin that businesses make on goods, in addition to costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent.

The input price measures the price of materials and fuels bought by UK manufacturers for processing. It includes materials and fuels that are both imported or sourced within the domestic market. It is also not limited to materials used in the final product, but includes what is required by businesses in their normal day-to-day running, such as fuels.

Index numbers shown in the main text of this bulletin are on a net sector basis. The index for any industry relates only to transactions between that industry and other industries; sales and purchases within industries are excluded.

Indices relate to average prices for a month. The full effect of a price change occurring part way through any month will only be reflected in the following month’s index.

All index numbers exclude VAT. Excise duty (on cigarettes, manufactured tobacco, alcoholic liquor and petroleum products) is included, except where labelled otherwise.

Each Producer Price Index (PPI) has two unique identifiers: a 10-digit index number, which relates to the Standard Industrial Classification code appropriate to the index and a 4-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

Every 5 years, producer price indices are rebased and weights updated to reflect industry changes.

Figures for the latest 2 months are provisional and the latest 5 months are subject to revisions in light of (a) late and revised respondent data and (b) for the seasonally adjusted series, revisions to seasonal adjustment factors are re-estimated every month. A routine seasonal adjustment review is normally conducted in the autumn each year.

Over the past 15 years, input Producer Price Index (PPI) has experienced large peaks and troughs and strong overall growth, driven by global movements in prices for crude oil and commodities (Figure 1). Between April 2002 and April 2017, input prices increased 74%, which was mainly fuelled by crude oil prices which rose 144% over the period. Output prices increased 31% across the same period.

Since the pre-downturn peak in mid-2008, output prices have grown 11.5%, while input prices were only 1.0% higher in April 2017 than they were back in June 2008. This suggests that while the UK production sector is currently bearing a similar overall cost for materials and fuels as it was in mid-2008, the amount it receives for goods at the factory gate is 11.5% higher.

The trend of rising input costs that started in February 2016 has stalled in recent months. Month-on-month growth of input prices has been relatively flat since January 2017 and while the annual rate has fallen back to 16.6%, this is a result of prices growing faster over the same period in 2016 (a base period effect) rather than an indication that prices have fallen.

The recent upward movement to the value of sterling since its low point towards the end of 2016 is the most likely reason for the stall to input price growth. Since its low point in October 2016, the sterling effective exchange rate has been strengthening, from an annual rate of decline of 17.9% in November 2016 to 7.8% in April 2017. All else equal, when the value of sterling appreciates, prices for imported materials and fuels fall.

Further evidence of an easing on import cost growth can be seen in the annual rate for imported materials and fuels, which has been lower than overall input prices for the latest three periods. The annual rate has also fallen back sharply since its 20.2% peak in January 2017.

Figure 2 shows the contributions by sector to the monthly and annual input price inflation rate. Crude oil provided the largest contribution of 5.82 percentage points to the annual rate and on the month it provided a contribution of 0.32 percentage points. Inputs of crude oil increased 46.6% on the year to April 2017 and by 2.8% on the month (Table 2). The positive month-on-month change in inputs of crude oil follows 2 months of negative growth.

Home food materials and imported metals prices provided the second and third largest contributions to the annual rate, with 3.42 and 1.94 percentage points respectively.

The annual rate for home food materials has been growing over the past 12 months, with the April figure of 25.6% (Table 2) being the highest annual increase seen since July 2008. The main contributors to the rise in home food materials were domestic products used in crop and animal production.

The annual rate of growth for imported metals has fallen back from an all-time record high of 37.0% in January 2017. In April 2017, prices rose 26.5% on the year, although fell 2.0% on the month, which is the first decline in prices since June 2016. The recent strengthening of sterling is the most likely factor for slowing growth. For further analysis on metal prices please refer to section 4 of the February Producer Price Inflation release.

The annual rate of growth for factory gate prices was up 3.6% in April 2017, unchanged from March 2017 and a slight decrease from February 2017. The unchanged annual rate in April 2017 reflects a base period effect however, and is not a sign that growth has stalled. The monthly rate has been positive since February 2016 and at 0.4% in March and April, growth is above an average of 0.3% for the previous 12 months.

This might suggest that while the cost of materials and fuels used in processing has flattened in recent months (Table 1), producers are still adjusting prices upwards to compensate for the sharp increase in input prices seen since February 2016. Seven of the ten production industries raised prices between March and April 2017 (Table 4).

All sectors showed upward contributions to the annual rate. Petroleum products had an annual growth rate of 16% (Table 4) and showed an upward contribution of 1.04 percentage points to the PPI output annual rate (Figure 3). The largest contributor to growth was diesel and gas oil, which increased 15.6% on the year. The annual growth rate for petroleum products has been slowing since February 2017, although April’s figure is the eighth consecutive period of positive growth following 3 years of falling prices.

Food products provided the second largest upward contribution to the annual rate with 0.62 percentage points, mainly driven by an increase in the prices of dairy products. For further analysis on food prices please refer to section 4 of the January Producer Price Inflation release.

Transport equipment also showed a large annual increase of 3.4%, mainly driven by prices within the manufacture of motor vehicles, trailers and semi-trailers. For further analysis of prices within the manufacture of motor vehicles, trailers and semi-trailers please refer to section 4 of the March Producer Price Inflation release.

In addition to the data included within this statistical bulletin, the following detailed datasets are available:

PPI Aerospace and Electronic Indices
PPI MM22 Producer Price Indices

Higher, lower and equal movements for each Producer Price Index are shown in the PPI records.

A summary of the revisions to PPI data are available in the PPI revision triangles:

PPI Revision triangle for total output (12 months)
PPI Revision triangle for total output (1 month)
PPI Revision triangle for total input (12 months)
PPI Revision triangle for total input (1 month)

Other important measures of inflation and prices include the Consumer Prices Index (CPI) and the Services Producer Price Index (SPPI).

The PPI Quality and Methodology Information document contains important information on:

• the strengths and limitations of the data and how it compares with related data
• users and uses of the data
• how the output was created
• the quality of the output including the accuracy of the data

If you would like more information about the reliability of the data, a PPI standard errors article was published 20 March 2017. The article presented the calculated standard errors of the Producer Price Index (PPI) during the period January 2016 to December 2016, for both month-on-month and 12-month growth.

Guidance on using indices in indexation clauses has been published on our website. It covers producer prices, services producer prices and consumer prices.

An up-to-date manual for the PPI, including the import and export index, is now available. PPI methods and guidance provides an outline of the methods used to produce the PPI as well as information about recent PPI developments.

Gross sector basis figures, which include intra-industry sales and purchases, are shown in PPI dataset Tables 4 and 6.

The detailed input indices of prices of materials and fuels purchased by industry (PPI dataset Table 6) do not include the Climate Change Levy (CCL). This is because each industry can, in practice, pay its own rate for the various forms of energy, depending on the various negotiated discounts and exemptions that apply.