Producer price inflation, UK: December 2017

• The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to December 2017, up from 3.1% in November 2017.

• Prices for materials and fuels (input prices) rose 4.9% on the year to December 2017, down from 7.3% in November 2017.

• All industries provided upward contributions to output annual inflation; the largest contribution was made by food products.

• Prices of imported materials and fuels increased 4.5% on the year to December 2017, down from 6.7% in November 2017.

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.

The use of core input inflation removes the more volatile indices of food, tobacco, beverages and petrol from our price values.

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 Value Added Tax (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 four-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

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

Figures for the latest two months are provisional and the latest five months are subject to revisions in light of late and revised respondent data and, 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.

Figure 1 shows input and output Producer Price Indices (PPI) across the past 15 years. Input PPI is driven mostly by commodity prices, which tend to be more volatile over time compared with prices for finished goods. Input PPI is also sensitive to exchange rate movements as roughly two-thirds of inputs into the UK manufacturing sector are imported.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose 4.9% in December 2017, which is down 2.4 percentage points from November 2017.

The one-month rate for materials and fuels rose 0.1% in December 2017 (Table 3), which is a 1.5 percentage points decrease from 1.6% in November 2017. On the month, inputs of fuels had the highest rate of growth at 1.8%, slowing down from their November 2017 peak of 3.9%.

The input Producer Price Index (PPI) reached 111.7 in December 2017, after steadily rising since July 2017. The index is now at its highest level since May 2014 when it stood at 112.5.

The annual rate of inflation for imported materials and fuels was 4.5% in December 2017 (Table 2), which is down from November 2017 when the annual rate stood at 6.7%. Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight.

The sterling effective exchange rate index (ERI) rose to 78.4 in December 2017. On the year, the ERI was up 0.1% in December 2017 and was the third consecutive month where the ERI has shown positive growth. This follows 21 consecutive months of negative growth between January 2016 and September 2017, and may be helping to slow the rate of inflation on imported materials, making imports of raw materials less expensive.

Table 3 shows monthly and annual growth rates for input prices by industry and Figure 2 shows contributions by those industries to the monthly and annual rate of input price inflation.

The largest upward contribution to the annual rate in December 2017 came from crude oil, which contributed 1.69 percentage points (Figure 2) on the back of annual price growth of 10.6% (Table 3), down from 26.9% last month. The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas, which rose by 10.6% on the year.

Home food materials and imported chemicals provided the second- and third-largest contributions to the annual rate, with 0.99 and 0.83 percentage points respectively. Prices for home food materials rose 6.9% on the year, while prices for imported chemicals rose 6.1%.

Fuel provided the largest upward contribution to the monthly rate at 0.21 percentage points, which was driven by price growth of 1.8% between November and December 2017, falling back from 3.9% in November.

Figure 3 shows contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices). Seven of the nine industries showed downward contributions in December 2017, with only imported chemicals and other imported parts and equipment applying an upward effect. Crude oil provided the largest downward contribution of 2.07 percentage points, largely resultant of the base year effect as the annual rate for crude oil peaked last year in December.

The annual rate of inflation for goods leaving the factory gate (output prices) rose by 0.2 percentage points to 3.3% in December 2017 (Table 4). This is the 18th consecutive month of positive inflation. Food products displayed the largest annual growth, increasing from 5.8% in November 2017 to 6.1% in December 2017 (Table 5).

The one-month rate remained the same at 0.4% in December 2017. The one-month rate has shown positive growth for all but one month since February 2016; in June 2017 the rate was flat.

Table 5 shows monthly and annual growth rates for output prices by industry and Figure 4 shows contributions by those industries to the monthly and annual rate of inflation at the factory gate.

Food products provided the largest upward contribution of 0.90 percentage points to the annual rate (Figure 4) driven by price growth of 6.1% on the year to December 2017 (Table 5). Growth was driven mostly by prices for dairy products, which rose 26.7% on the year, unchanged from last month and continues a sequence of 15 months of upward inflation.

Tobacco and alcohol products, and chemical and pharmaceutical products show the second- and third-largest upward contributions to the annual rate, with 0.37 and 0.35 percentage points respectively. Tobacco and alcohol products increased 3.9% on the year, while prices for chemical and pharmaceutical products grew by 4.9%.

Tobacco and alcohol, and chemical and pharmaceutical products provided the largest upward contributions to the monthly rate at 0.13 percentage points each.

Figure 5 shows contributions to the change in the annual rate for factory gate prices (output prices).

The 0.2 percentage points rise in the annual rate between November 2017 and December 2017 was a result of upward contributions from six industries; tobacco and alcohol, chemicals and pharmaceuticals, food products, other manufactured products, clothing textiles and leather and transport equipment. Paper and printing had no impact, while the remaining three product groups all had negative contributions to the change in the rate, with petroleum products having the largest downward movement. The largest upward contribution of 0.13 percentage points came from tobacco and alcohol products.

Figure 6 illustrates the extent to which food prices have contributed to the annual rate of growth of total output prices, over a five-year period between December 2012 and December 2017. The annual output price inflation was showing negative growth of 0.2% at the time of the EU referendum in June 2016. Since then, it has risen consistently to a peak of 3.7% in February 2017 and has fluctuated between 2.9% and 3.7% for the remainder of 2017.

Over this period, food has often been one of the largest contributors to the overall output price. Food prices’ contribution to the output annual rate of inflation remained negative between May 2014 and September 2016. Since then, output food prices have shown positive contributions to the annual rate throughout 2017.

Figure 7 looks at the contributions of the different food products to the overall food annual rate of inflation over the same period. This shows how dairy products were the most important contributors to the food products annual rate throughout 2015, as we also analysed in the January 2017 bulletin.

Since November 2016, dairy products have been consistently one of the two largest contributors to the output food rate alongside the “other food products” group.

Between January and December 2017, the annual rate of growth for food prices increased 4.1 percentage points, from 2.0% to 6.1%. Over the same period, prices for dairy products increased 19.8 percentage points and the annual rate now stands at 26.7%.

Annual growth within dairy products is by far the highest amongst food products and this is reflected in its overwhelming contribution to the annual rate for food products. As of December 2017, prices for dairy products are contributing 3.29 percentage points to the annual rate for food products as a whole, which stands at 6.1%.

Contributory factors influencing growth in prices for dairy products include an imbalance between global demand and supply. We have seen lower than expected milk production by some of the world biggest exporters in 2017, with countries such as New Zealand becoming victim of poor weather conditions (Source: Agriculture and Horticulture Development Board). This, combined with rising global demand for milk (Source: Organisation for Economic Co-operation and Development via Farmers Weekly), could be playing a significant part in rising prices for dairy products in the UK.

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

Aerospace and electronic cost indices time series data Producer Price Index time series data

Higher, lower and equal movements for each Producer Price Index are shown in the Producer price inflation records: monthly figures.

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

Producer price inflation revision triangle: total output 12-month (JVZ7) Producer price inflation revision triangle: total output 1-month (JVZ7) Producer price inflation revision triangle: total input 12-months (K646) Producer price inflation revision triangle: total input 1-month (K646)

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

The Producer Price Index (PPI) Quality and Methodology Information report contains important information on:

• the strengths and limitations of the data and how it compares with related data

• uses and users 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 on 20 March 2017. The article presented the calculated standard errors of the 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 (PDF, 197KB) 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 (PDF, 1.18MB) 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.