Producer price inflation, UK: December 2019

Changes in the prices of goods bought and sold by UK manufacturers including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices).

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Cyswllt:
Email Martina Portanti

Dyddiad y datganiad:
15 January 2020

Cyhoeddiad nesaf:
19 February 2020

1. Main points

  • The headline rate of output inflation for goods leaving the factory gate was 0.9% on the year to December 2019, up from 0.5% in November 2019.
  • The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.1% on the year to December 2019, up from negative 1.9% in November 2019.
  • Petroleum products made the largest upward contribution to the change in the annual rate of output inflation.
  • Crude oil provided the largest upward contribution to the change in the annual rate of input inflation.
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2. Things you need to know about this release

The Office for National Statistics (ONS) will be implementing important methodological improvements to the Producer Price Index and Services Producer Price Index by summer 2020. These include moving from fixed-base weights to annual chain-linking, which will improve the accuracy of these statistics. At the same time, we will be introducing changes to the level of detail of the data we publish and changes to our PPI headline figure from net to gross in line with international best practice. In order to support users with the transition to the new headline definition, Section 6 includes a comparison between the existing measures of output and input PPI on a net and on a gross basis.

We will pre-announce the exact date when these changes will be implemented over the coming few months in order to give users as much notice as possible. Detailed technical information, including impact analysis, will be made available in advance of this change.

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 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 taking account 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.

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3. Producer price inflation summary

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 PPI). Input PPI is also sensitive to exchange rate movements as roughly two-thirds of inputs into the UK manufacturing sector are imported.

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4. Annual output inflation picks up for the first time in five months

The annual rate of inflation for goods leaving the factory gate (output prices) increased from 0.5% in November 2019 to 0.9% in December 2019 (Table 1). This is the first time the rate has picked up since July 2019. The annual rate has now remained positive for 42 consecutive months, last showing negative growth in June 2016.

On the month, the rate of output inflation was flat, following three consecutive months of negative growth from September 2019 to November 2019.

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.

Nine of the ten product groups provided positive contributions to the output annual rate.

Transport equipment provided the largest upward contribution of 0.21 percentage points to the annual rate (Figure 2), with price growth of 1.7% on the year to December 2019 (Table 2). This industry has displayed positive annual growth since January 2016.

Computer, electrical and optical products displayed the second-largest upward contribution of 0.17 percentage points to the annual rate, with annual growth of 1.4% in December 2019.

Chemicals and pharmaceuticals was the only product group to provide a negative contribution to the annual rate, at 0.12 percentage points. This industry has provided a negative contribution to the annual rate for the last six months.

On the month, output inflation was flat in December 2019. Six product groups displayed offsetting movements, with petroleum showing the largest downward contribution, at 0.10 percentage points, and food products, and tobacco and alcohol showing the highest upward contribution, both at 0.05 percentage points. Four product groups made no contribution either way.

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

There was a 0.4 percentage point increase in the annual rate for output prices, from 0.5% in November 2019 to 0.9% in December 2019. Four of the ten product groups displayed upward contributions to the change in the rate, with petroleum products providing the largest upward contribution, at 0.48 percentage points (Figure 3). The annual rate of petroleum products was 0.1% in December 2019, up from negative 4.7% in November 2019. This is the first time the rate has been positive since May 2019. Petroleum prices fell by 1.2% between November 2019 and December 2019 but fell by a larger amount (6.0%) in the same period last year, resulting in an upward contribution to the change in the annual rate.

Tobacco and alcohol, food products, and chemicals and pharmaceuticals provided smaller upward contributions to the change in the rate.

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5. Annual input inflation picks up but continues to display negative growth

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) was negative 0.1% in December 2019, up from negative 1.9% in November 2019. This is the fifth consecutive month in which the rate has been negative, following 37 consecutive months of positive annual growth from July 2016 to July 2019.

The monthly rate for materials and fuels purchased slowed from 0.5% in November 2019 to 0.1% in December 2019 (Table 3). This is the first time there has been two consecutive months of positive monthly growth since October 2018.

The annual rate of inflation for imported materials and fuels was negative 0.8% in December 2019 (Table 4), which is up 1.4 percentage points from November 2019 when it was negative 2.2%. This is the fourth consecutive month that the annual rate has been negative. The monthly rate rose from negative 0.6% in November 2019 to negative 0.5% in December 2019. 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) grew by 1.4% on the month to 80.7 in December 2019. This is the highest the index value has been since June 2016. On the year, the ERI displayed growth of 5.2% in December 2019 (source: Bank of England), the highest the annual rate has been since November 2015.

All else being equal, a stronger sterling effective exchange rate will lead to less expensive inputs of imported materials and fuels.

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.

Four of the nine product groups provided negative contributions to the input annual rate.

The largest downward contribution to the annual rate in December 2019 came from imported chemicals, which contributed 2.60 percentage points (Figure 4) and had negative annual price growth of 7.8% (Table 5). This downward contribution was driven by imported products used in the manufacture of petrochemicals. Imported chemicals has now displayed negative annual growth for six consecutive months and this is the lowest the rate has been since June 1999.

Home food materials provided the second-largest downward contribution to the annual rate at 1.67 percentage points, with negative price growth of 4.7%. This was driven by domestic products used in crop and animal production; hunting and related service activities, which had negative growth of 4.9% on the year and continues six months of negative growth.

The largest upward contribution to the annual rate in December 2019 came from crude oil, with a contribution of 2.72 percentage points and price growth of 7.1%. This follows seven consecutive months of negative annual growth between May 2019 and November 2019. The average price for world crude oil was US $63 per barrel in December 2019, which is 4.9% higher than the previous month and 17.4% higher than a year ago (source: World Bank). This is the first time the annual rate of world crude oil has been positive since November 2018.

On the month, home produced food provided the largest upward contribution of 0.20 percentage points, with prices rising by 1.7%.

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 1.8 percentage point increase in the annual rate for input prices, from negative 1.9% in November 2019 to negative 0.1% in December 2019. Despite this, only three out of the nine product groups displayed upward contributions to the change in the rate.

Crude oil provided the largest upward contribution to the change in the rate, at 2.43 percentage points. The annual growth of crude oil increased 15.0 percentage points from negative 7.9% in November 2019 to 7.1% in December 2019. This is mostly down to a base year effect with only a small increase of 0.3% between November 2019 and December 2019, compared with a fall of 13.7% between the same period last year.

Home food materials provided the second-largest upward contribution to the change in the rate, at 0.24 percentage points.

Imported chemicals provided the largest downward contribution to the change in the rate, at 0.34 percentage points.

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6. Gross and net producer price indices

Producer price indices (PPIs) are measured on two different bases: gross and net of inter-sector sales. Gross sector PPIs include products sold by one business to another business classified to the same industry sector. Net sector PPIs exclude (net out) products sold by a business to another business classified to the same industry sector.

The Office for National Statistics (ONS) currently headlines with net sector PPIs, which include duty. We will move our headline to a gross sector basis excluding duty by summer 2020, in line with international best practice.

Figure 6 shows net and gross output producer price indices (PPI) over the past 10 years. In December 2019, the net output PPI was 115.8 while the gross output excluding duty PPI was 116.4.

As shown in Figure 7, gross and net sector output indices display similar trends over time, although the gross indices show higher volatility, particularly at times of high inflation, either positive or negative. For net output PPI, the annual growth was 0.9% in December 2019, up from 0.5% in November 2019. For gross output excluding duty PPI, the annual growth in December 2019 was 0.8%, which is up from negative 0.1% in November 2019.

Figure 8 shows net and gross input PPI over the past 10 years. The trends of the indices are similar, although the net input PPI appears more volatile than the gross input PPI. In December 2019, the net input PPI was 115.9 while the gross input PPI was 115.2.

Figure 9 also shows that the annual growth rates for net input PPI are more volatile than for gross input PPI. For net input PPI, the annual growth was negative 0.1% in December 2019, up from negative 1.9% in November 2019. For gross input PPI, the annual growth in December 2019 was negative 0.3%, up from negative 1.0% in November 2019.

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8. Quality and methodology

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Producer price indices (PPI) QMI.

If you would like more information about the reliability of the data, a PPI standard errors article was 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.

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Manylion cyswllt ar gyfer y Bwletin ystadegol

Martina Portanti
business.prices@ons.gov.uk
Ffôn: +44 (0)1633 456907