Producer price inflation, UK: December 2018

• The headline rate of output inflation for goods leaving the factory gate was 2.5% on the year to December 2018, down from 3.0% in November 2018.

• The growth rate of prices for materials and fuels used in the manufacturing process slowed to 3.7% on the year to December 2018, down from 5.3% in November 2018.

• Petroleum products and crude oil provided the largest contribution to the change in the annual rate of output and input inflation respectively.

• Crude oil increased 0.4% on the year to December 2018, down from 13.1% in November 2018.

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 statistics.

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). The Soft Drinks Industry Levy, introduced in April 2018, is also excluded. 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 2007: SIC 2007 code appropriate to the index, and a four-character alpha-numeric code (series ID), which can be used to find series when using the time series dataset for PPI.

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. Revisions to seasonal adjustment factors are re-estimated every month for the seasonally adjusted series. A routine seasonal adjustment review is normally conducted in the autumn each year.

Figure 1 shows input and output Producer Price Indices (PPI) over 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 (output prices). 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 goods leaving the factory gate (output prices) fell by 0.5 percentage points to 2.5% in December 2018 (Table 1). The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation fell 0.3% in December 2018, the first negative monthly growth since January 2016.

Figure 2 shows contributions by product group to the monthly and annual rate of output inflation and Table 2 shows monthly and annual growth rates by product group.

Chemicals and pharmaceutical products provided the largest upward contribution of 0.40 percentage points to the annual rate (Figure 2), due to price growth of 5.3% on the year to December 2018 (Table 2). This was driven mainly by prices for chemicals and chemical products, which increased by 7.8% on the year to December 2018.

Petroleum products showed the second-largest upward contribution of 0.38 percentage points to the annual rate, with annual growth of 5.1% in December 2018.

The monthly rate of output inflation fell by 0.3%, with the largest downward contribution coming from petroleum products (0.43 percentage points). Prices for petroleum products fell 4.7% on the month in December 2018. This is the second consecutive monthly drop within this product group and the lowest the monthly rate has been since January 2015. This was driven mainly by diesel and gas oil products, which fell 4.1% in December 2018.

Figure 3 shows contributions to the change in the annual rate for factory gate prices (output prices).

Five product groups provided downward contributions to the 0.5 percentage points decrease in the rate between November 2018 and December 2018. The largest downward movement came from petroleum products, at 0.33 percentage points.

The change in the annual rate was also influenced by downward contributions in tobacco and alcohol, chemicals and pharmaceuticals, and food products.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) slowed to 3.7% in December 2018, down 1.6 percentage points from November 2018 (Table 3). The 12-month rate of input inflation has been positive since July 2016 but has slowed for the third consecutive month. The annual rate was driven predominantly by fuel prices, which showed growth of 8.3% in December 2018, although this was down from 9.4% in November 2018.

The one-month rate for materials and fuels fell for the second consecutive month, with negative growth of 1.0% in December 2018 (Table 3). This was driven by inputs of crude oil, which displayed negative price growth of 9.7% on the month.

The annual rate of inflation for imported materials and fuels was 3.3% in December 2018 (Table 4), down from 4.9% in November 2018. 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) fell 2.0% on the month to 76.7 in December 2018 (Table 4), the lowest the index has been since August 2017 (Bank of England).

Figure 4 shows contributions by product group to the monthly and annual rate of input inflation and Table 5 shows monthly and annual growth rates by product group.

The largest positive contribution to the annual rate in December 2018 came from fuel, which contributed 0.89 percentage points (Figure 4) and had annual price growth of 8.3% (Table 5). The positive contribution from fuel was driven mainly by gas distribution prices, which rose 15.6% on the year, although this has fallen from 19.7% in November 2018.

Imported parts and equipment provided the second-largest contribution to the annual rate (0.54 percentage points) with annual price growth of 3.2%.

Crude oil only contributed 0.07 percentage points to the annual rate on the back of annual growth of 0.4%, down from 13.1% in November 2018.

Crude oil prices were the main contributor to the negative monthly input inflation rate, with a downward contribution of 1.69 percentage points and negative price growth of 9.7%. This is the second consecutive drop in the monthly crude oil rate. In December 2018, world Brent prices fell to an average of US $54 per barrel, down from US $62 per barrel in November 2018. This is the lowest world Brent prices have been since September 2017 (World Bank).

Figure 5 shows contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices).

There was a 1.6 percentage points drop in the annual rate for inputs between November 2018 and December 2018, with two product groups displaying downward contributions to the change in the rate. Crude oil provided the largest downward contribution of 2.20 percentage points. The only other downward contribution to the change in rate came from fuel, at 0.11 percentage points.

Other imported parts and equipment provided the largest upward contribution to the change in the rate, at 0.24 percentage points.

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-months (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, PPI standard error datasets were published on 18 May 2018. The tables present the calculated standard errors of the PPI during the period January 2017 to December 2017, 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.