Producer price inflation, UK: February 2018

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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Email Martina Portanti

Dyddiad y datganiad:
20 March 2018

Cyhoeddiad nesaf:
18 April 2018

1. Main points

  • The headline rate of inflation for goods leaving the factory gate (output prices) was 2.6% on the year to February 2018, down from 2.8% in January 2018.

  • Prices for materials and fuels (input prices) rose 3.4% on the year to February 2018, down from 4.5% in January 2018.

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

  • Crude oil continued to provide the largest upward contribution to the input annual inflation, despite providing the largest downward contribution on the month.

  • From April 2018, publication of these figures will move from Tuesday to Wednesday; the new release dates are available.

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2. Things you need to know about this release

Further improvements to the EPI and IPI sample coverage has been included within this release. All of these changes are described in the November 2016 article, Improvements to the Import and Export Price Indices (IPI and EPI) and Services Producer Price Indices (SPPI). The Standard Industrial Classification (SIC) two-digit indices within this wave of improvements are:

(EPI) 10, 11, 12, 13, 14, 15, 31 and 32
(IPI) 02, 10, 11, 12, 15, 20, 21 and 22

The next wave of improvements will be announced in the October 2018 release.

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 SIC 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.

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.

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3. Producer price inflation summary

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.

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4. Annual output inflation rate remains positive while monthly prices stay flat

The annual rate of inflation for goods leaving the factory gate (output prices) fell slightly by 0.2 percentage points to 2.6% in February 2018 (Table 1). On the month, output prices were flat. The 12-month rate of output inflation has been positive since July 2016.

Table 2 shows monthly and annual growth rates for output prices by industry and Figure 2 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 0.64 percentage points to the annual rate (Figure 2), driven by price growth of 4.3% on the year to February 2018 (Table 2). Food products annual growth was driven mainly by prices for dairy products, which rose 18.0% on the year. Dairy products annual inflation appeared to start slowing down from its peak of 26.8% in December 2017, with a negative rate of monthly inflation recorded for both January and February 2018 as prices decreased.

Chemical and pharmaceutical products showed the second-largest upward contribution to the annual rate (0.33 percentage points). The 12-month rate for chemical and pharmaceutical products increased from 4.4% in January 2018 to 4.5% in February 2018, which is the highest growth in this sector since May 2017.

The largest downward contribution to the monthly rate of output inflation came from petroleum products prices, which saw a decrease of 2.3 percentage points to a negative 1.4% in February 2018. This is the largest decrease seen on the monthly rate of petroleum products since December 2015.

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

The 0.2 percentage points fall in the annual rate between January 2018 and February 2018 was as a result of downward contributions from four industries: petroleum products, food products, clothing, textile and leather, and tobacco and alcohol. The largest downward contribution came from petroleum products and food products, at 0.14 and 0.11 percentage points respectively. The largest upward contribution of 0.06 percentage points came from other manufactured products.

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5. Annual inflation rate for materials and fuels bought remains positive

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) in February 2018 was 3.4%, down from 4.5% in January 2018 and the lowest it has been since June 2016. This is largely due to a base year effect following high annual inflation recorded in 2017.

The one-month rate for materials and fuels fell 1.5 percentage points to a negative 1.1% in February 2018 (Table 3). This was driven by inputs of crude oil, which fell to a negative 7.1% on the month, after seven consecutive months of positive inflation.

The input Producer Price Index (PPI) value decreased for the first time in eight months and in February 2018 it stood at 111.7, down from 112.9 in January 2018.

The annual rate of inflation for imported materials and fuels was 3.0% in February 2018 (Table 4), which is down from January 2018 when the annual rate stood at 3.6%. Although the rate of growth has been slowing down, imported materials and fuels have shown positive annual inflation for 21 consecutive months. 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) remained unchanged on the month at 79.0 in February 2018. On the year, the ERI was up 1.8% in February 2018 and was the fifth consecutive month where the ERI has shown positive annual growth. This may be helping to slow the rate of inflation on imported materials, making imports of raw materials less expensive.

Table 5 shows monthly and annual growth rates for input prices by industry and Figure 4 shows contributions by those industries to the monthly and annual rate of input price inflation.

The largest upward contribution to the annual rate in February 2018 came from crude oil, which contributed 1.05 percentage points (Figure 4) and had annual price growth of 6.6% (Table 5), down from 13.8% last month. The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas.

Imported chemicals and home food materials provided the second- and third-largest contributions to the annual rate, with 0.68 and 0.61 percentage points respectively. Prices for imported chemicals rose 5.0% on the year, while prices for home food materials rose 4.3%.

Crude oil prices were the main driver to the negative monthly input inflation rate, with a downward contribution of 1.23 percentage points, on the back of a price decrease of 7.1% on the month.

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 1.1 percentage points drop in the annual rate for inputs between January 2018 and February 2018, with only three product groups – imported food materials, other imported parts and equipment, and imported chemicals – displaying upward contributions to the change in the rate. Imported food materials provided the largest upward contribution of 0.22 percentage points. Six industries provided a negative contribution, with crude oil being the main driver with a downward contribution of 1.19 percentage points. Home-produced food provided the second-largest downward contribution at 0.25 percentage points, whilst the other four industries provided smaller negative contributions to the rate.

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7. Quality and methodology

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.

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