Producer price inflation, UK: December 2015

• The price of goods bought and sold by UK manufacturers, as estimated by the producer price index, continued to fall in the year to December 2015. Crude oil continued to drive down input prices, feeding through to a drop in output prices of petroleum products

• Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.2% in the year to December 2015, compared with a fall of 1.5% in the year to November 2015

• Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, increased 0.1% in the year to December 2015, compared with a fall of 0.1% in the year to November 2015

• The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 10.8% in the year to December 2015, from a fall of 13.1% in the year to November 2015

• Core input prices, which exclude the more volatile food, beverage, tobacco and petroleum products fell 7.0% in the year to December 2015, compared with a fall of 8.4% in the year to November 2015

The Producer Price Index (PPI) is a monthly survey that measures the price changes of goods bought and sold by UK manufacturers and provides an important measure of inflation, alongside other indicators such as the Consumer Price Index (CPI) and Services Producer Price Index (SPPI). This statistical bulletin contains a comprehensive selection of data on input and output index series and also contains producer price indices of materials and fuels purchased and output of manufacturing industry by broad sector.

The output price indices measure change in the prices of goods produced by UK manufacturers (these are often called “factory gate prices”).

The input price indices measure change in the prices of materials and fuels bought by UK manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running.

The factory gate price (the output price) is the price of goods sold by UK manufacturers and is the actual cost of manufacturing goods before any additional charges are added, which would give a profit. It includes costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent.

Core factory gate inflation excludes price movements from food, beverage, petroleum, and tobacco and alcohol products, which tend to have volatile price movements. It should give a better indication of the underlying output inflation rates.

The input price is the cost of goods bought by UK manufacturers for the use in manufacturing, such as the actual cost of materials and fuels bought for processing.

Core input inflation strips out purchases from the volatile food, beverage, tobacco and petroleum industries to give an indication of the underlying input inflation pressures facing the UK manufacturing sector.

Factory gate inflation fell 1.2% in the year to December 2015, compared with a fall of 1.5% last month.

During 2012 and 2013, core factory gate inflation tended to run at a lower rate than total output inflation, and showed a smaller degree of volatility. This trend changed in 2014, as total output fell into negative inflation: a result of the downward pressures from petroleum, which is excluded from the core measure of inflation. In 2015, total output inflation has remained consistently below core output price inflation, with total output averaging an annual fall of 1.6% during 2015 and core output averaging growth of 0.2% in the same period. (Figure A)

Looking at the latest estimates (Table A), movements in factory gate prices over the 12 months to December 2015 were as follows:

• factory gate prices fell 1.2%, compared with a fall of 1.5% in the year to November 2015

• core factory gate prices increased 0.1%, compared with a fall of 0.1% in the year to November 2015

• factory gate inflation excluding excise duty fell 0.9%, compared with a decrease of 1.2% in the year to November 2015

Between November and December 2015:

• factory gate prices decreased 0.2%, unchanged from last month

• core factory gate prices increased 0.2%, compared with a fall of 0.2% last month

Table B shows the annual percentage change in price across all product groups and Figure B shows their contribution to the annual factory gate inflation rate.

Table C shows the monthly percentage change in price across all product groups and Figure C shows their contribution to the month factory gate inflation rate.

Factory gate prices fell 1.2% in the year to December 2015, compared with a decrease of 1.5% in the year to November 2015. This index has now seen negative movements on the year every month since July 2014. The main contribution to the annual rate for November 2015 came from petroleum products. Smaller falls in the prices of food products, chemicals and pharmaceuticals, and transport equipment also contributed towards the fall in the output of manufactured product prices (Figure B).

The monthly price index between November and December 2015 saw a fall of 0.2%, unchanged from last month. Although most product groups showed small increases, a large downward movement from petroleum products contributed to an overall fall in the monthly rate (Figure C).

Petroleum product prices fell 14.2% in the year to December 2015, up from a fall of 16.9% in the year to November 2015. The largest decrease seen in this index was in July 2009, when it fell by 21.3%. The contributions to this fall in the latest annual rate came from diesel and gas oil, motor spirit, and aviation turbine fuel.

Between November and December 2015, petroleum prices fell 3.0%, compared with a decrease of 1.4% between October and November 2015. Falling prices of diesel and gas oil, and motor spirit were the main contributions to the fall in the monthly index.

Food products fell 2.1% in the year to December 2015, down from a fall of 1.6% in the year to November 2015. The monthly index for food products fell 0.3% between November and December 2015, down from a fall of 0.2% between October and November 2015. The main contributions to the decrease in the annual and monthly indices came from dairy products, preserved meat and meat products, and prepared animal feeds with prices falling by 5.8%, 2.3% and 3.2% respectively on the year and 0.2%, 0.3% and 0.6% respectively between November and December.

Core factory gate inflation

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum product prices, giving a measure of the underlying factory gate inflation, increased 0.1% in the year to December 2015, compared with a fall of 0.1% in the year to November 2015. Falls in chemicals and pharmaceuticals, and transport equipment were offset by increases in prices for other manufacturing products in the annual index.

The monthly index showed an increase of 0.2% between November and December 2015, compared with a decrease of 0.2% between October and November 2015. Transport equipment, paper and printing products, and computers, electrical and optical equipment contributed to the increase in the index.

Output producer price index contribution to change in rate

The annual percentage rate for the output PPI in December 2015 fell 1.2%, compared with a fall of 1.5% last month, resulting in an increase in the annual rate of 0.3 percentage points. The main contribution to the increase came from petroleum products (Figure D).

Figure E shows the year on year growth in output PPI by grouping for the latest 2 months and the range of the price changes that have been seen in these sections since January 2015. It can be seen that the majority of output PPI indices have experienced little variance in inflation during 2015. Petroleum shows the biggest decrease, ranging from falls of 20.7% in January 2015 to 14.2% in May and December 2015. Tobacco and alcohol shows the biggest increase, ranging from rises of 3.6% in January 2015 to 0.4% in September 2015.

Figure E: Output prices PPI by grouping, January to December 2015

UK

Source: Office for National Statistics

Download this image Figure E: Output prices PPI by grouping, January to December 2015

.png (14.4 kB) .xls (28.7 kB)

Figure F shows the annual movements in total input prices (including materials and fuels) and core input prices (excluding purchases from food, beverage, tobacco and petroleum industries) purchased by the UK manufacturing industry. Between April 2012 and October 2013, both series showed relatively similar movements. From November 2013, both series have been showing a downward trend, with total input prices falling more rapidly. There has been a significant gap in the price movements of total input prices and core input prices since November 2014, however, this gap has been narrowing in recent months.

Looking at the latest data (Table D), the main movements in the year to December 2015 were as follows:

• the total input price index fell 10.8%, compared with a fall of 13.1% in the year to November 2015

• the core input price index saw a fall of 7.0%, compared with a fall of 8.4% in the year to November 2015

• the price of imported materials as a whole (including crude oil) fell 10.6%, compared with a decrease of 13.5% in the year to November 2015 (Reference table 7)

Between November and December 2015:

• the total input price index fell 0.8%, compared with a fall of 1.6% last month (Table D)

• in seasonally adjusted terms (see Table D), the input price index for the manufacturing industry excluding the food, beverage, tobacco and petroleum industries rose 0.6%, compared with a fall of 1.5% from last month

Notes for Input prices: summary

1. Input price indices include the Climate Change Levy which was introduced in April 2001.

2. Input price indices include the Aggregate Levy (13.9 Kb Pdf) which was introduced in April 2002.

Table E and Figure G show the percentage change in the price of the main commodities groups over the year and their contributions to the total input index.

Table F and Figure H show the percentage change in the price of the main commodities groups over the month and their contributions to the total input index.

The overall input index for all manufacturing, which measures changes in the price of materials and fuels purchased by manufacturers, fell 10.8% in the year to December 2015, compared with a fall of 13.1% in the year to November 2015. The main downward contributions to the index came from crude oil with much smaller, but notable, downward contributions from home produced food and imported metals.

Imported metal prices fell 20.0% in the year to December 2015; one of the largest decreases since records began in 1997. The main contribution came from imported products used in the manufacture of other basic metals and casting, which fell 20.4%. The price of the majority of metals measured in the PPI have fallen significantly due to the recent performance of the Chinese manufacturing sector. Until recently the manufacturing sector in China has seen strong growth resulting in high demand, which pushed up prices. The current downturn in performance has meant a reduced demand for these materials and an oversupply in the current market. This has led to a sharp fall in price.

The monthly input index fell 0.8% between November and December 2015, compared with a fall of 1.6% between October and November 2015. This fall was driven by decreases in the price of crude oil and home produced food, slightly offset by an increase in the price of other imported parts and equipment, driven by an increase in the price of imported motor vehicles (see Table F and Figure H).

Crude oil annual prices have been falling since October 2013. The index fell 33.2% in the year to December 2015, compared with a decrease of 40.4% in the year to November 2015. The monthly index for crude oil fell 7.4% between November and December 2015, compared with a fall of 6.5% between October and November 2015. The main contribution to both the annual and monthly indices came from imported crude petroleum and natural gas, which fell 32.9% in the year to December 2015 and 7.7% between November and December 2015.

At present a continued oversupply of oil continues to place downward pressures on prices. This oversupply has been driven by the decision by OPEC to continue high levels of production despite reduced global demand. This situation is predicted to continue into late 2016 with no signs of OPEC cutting production. An informal agreement by US congress leaders to lift the US ban on export of crude oil may also add to the current stock levels in the future.

The monthly index for home produced food showed a considerable decrease of 3.0% between November and December 2015. This decrease was driven by crop and animal production which fell 4.1% on the month, the largest decrease in the index since August 2014. This has been driven by a fall in prices for home produced chickens, due to oversupply.

Core input price index (excluding purchases from the food, beverage, tobacco and petroleum industries)

The core input price index, in seasonally adjusted terms, increased 0.6% between November and December 2015, compared with a fall of 1.5% between October and November. In the year to December 2015, the index fell 7.1% compared with a fall of 8.4% in the year to November; these are 2 of the largest decreases seen in this index since records began in 1996.

The unadjusted index fell 7.0% in the year to December 2015, compared with a decrease of 8.4% in the year to November; as with the adjusted series these are 2 of the largest decreases seen in this index since records began in 1997. The monthly index increased 0.6% between November and December 2015, compared with a decrease of 1.2% between October and November. This increase in the monthly rate is driven by rises in other imported parts and equipment, imported chemicals and imported metals.

Input producer price index contribution to change in rate

The annual percentage rate for the input PPI in December 2015 fell 10.8%, compared with a decrease of 13.1% last month, resulting in an increase in the annual rate of 2.3 percentage points. This was mainly due to a significant increase from crude oil and smaller increases from other imported parts and equipment (Figure I).

Figure J shows the year on year growth in input PPI by grouping for the latest 2 months and the range of the price changes that have been seen in these groupings since January 2015. It can be seen that the majority of input PPI indices have experienced little variance in inflation during 2015. Crude oil shows the biggest decrease, ranging from falls of 48.5% in January 2015 to 33.2% in December 2015. Other home produced materials shows the biggest increase, ranging from rises of 7.7% in March 2015 to 1.5% in October 2015.

Imported metals has shown the largest range of price changes, ranging from 2.2% in January 2015 to -20.5% in November 2015.

Figure J: Input prices PPI by grouping, January to December 2015

UK

Source: Office for National Statistics

Download this image Figure J: Input prices PPI by grouping, January to December 2015

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Input producer prices fell by 10.8% in the year to December 2015, following a 13.1% decrease in the year to November, continuing the recent trend of falling input prices. Output producer prices also fell in December, suggesting that lower input costs are continuing to feed into the price of manufacturers. Output producer price inflation rose slightly to -1.2% in the year to December 2015 from -1.5% in the year to November.

Much of the recent decline in input and output producer price inflation is the result of lower oil and petroleum prices, as the cost of oil, energy and of refined petroleum products has influenced the prices of manufacturers. Brent crude oil has fallen sharply in price since mid-2014 – from around $110 per barrel in June 2014, to around $60 per barrel in December 2014 and to less than $40 per barrel in December 2015. As a result, crude oil and refined petroleum product prices accounted for 5.3 percentage points of the 10.8% fall in input producer prices in the year to December 2015, and for 1.1 percentage points of the 1.2% fall in output producer prices over the same period.

Alongside recent changes in oil prices, changes in currency exchange rates may also have had an impact on producer prices. A stronger pound, increasing in value by 4.7% between December 2014 and December 2015, has reduced the price of imports to the UK with a corresponding impact on the prices paid by producers for imports. However, movements in the sterling exchange rate with the US dollar and the euro have reflected the diverging paths of monetary policy in the US and eurozone. Sterling fell by 4.2% against the US dollar in the year to December 2015 (making imports more expensive from the US), but has appreciated by more than 8.5% against the euro (making imports cheaper from the eurozone) over the same period. In aggregate, changes in the prices of imported products accounted for around 3.4 percentage points of the 10.8% fall in input prices in the year to December 2015.

While the lower oil price and changes in the value of sterling have had the largest impact on producer prices, recent changes in the UK’s labour market have raised the possibility of stronger wage pressures. Following strong employment growth over the past 2 years, the headline unemployment rate fell to 5.2% in the 3 months to October 2015, reducing the number of potential workers to manufacturing firms. Existing manufacturing workers have also been working longer hours; average hours worked in the manufacturing industry has recovered much of the ground lost during the economic downturn. Productivity in manufacturing – growth in which permits firms to produce more output per unit of labour input – fell by 2.0% in the year to Quarter 3 (July to Sept) 2015. However, despite these measures indicating the potential for stronger wage pressures, average weekly earnings growth in manufacturing has been relatively modest in recent months. Average weekly total pay in manufacturing grew by 1.5% in the 3 months to October 2015 when compared with the same 3 months a year earlier – unchanged from September 2015, and weaker than for the whole economy.

Lower input prices also appear to have helped the manufacturing industry to meet growing demand without raising prices. Demand for goods and services in the UK economy remains relatively strong. GDP grew by 0.4% in quarter 3 2015, the 11th consecutive quarter of positive growth. However, much of this growth was concentrated in the services industry with manufacturing output falling by 0.4% in quarter 3 2015.

For this bulletin ( Reference tables 8R and 9R (228.5 Kb Excel sheet) ) highlight revisions to movements in price indices previously published in last month’s statistical bulletin. These are mainly caused by changes to the most recent estimates, as more price quotes are received, and revisions to seasonal adjustment factors, which are re-estimated every month.

For more information about our revisions policy, see our website.

Revisions to data provide one indication of the reliability of main indicators. Table G shows summary information on the size and direction of the revisions which have been made to the data covering a 5-year period. A statistical test has been applied to the average revision to find out if it is statistically significantly different from zero. An asterisk (*) shows that the test is significant.

Table G presents a summary of the differences between the first estimates published between 2010 and 2015 and the estimates published 12 months later. These numbers include the effect of the reclassification onto Standard Industrial Classification (SIC) 2007.

Spreadsheets giving revisions triangles of estimates for all months from January 1998 through to November 2015 and the calculations behind the averages in the table are available in the reference table area of our website:

Revision triangle for total output (12 months) (2.54 Mb Excel sheet)

Revision triangle for total output (1 month) (2.5 Mb Excel sheet)

Revision triangle for total input (12 months) (2.55 Mb Excel sheet)

Revision triangle for total input (1 month) (2.55 Mb Excel sheet)