Producer price inflation, UK: February 2021

• The headline rate of output inflation for goods leaving the factory gate showed positive growth of 0.9% on the year to February 2021, up from positive growth of 0.1% in January 2021.

• The price for materials and fuels used in the manufacturing process showed positive growth of 2.6% on the year to February 2021, up from positive growth of 1.6% in January 2021.

• Food products, and metals and non-metallic minerals provided the largest upward contribution to the annual rate of output and input inflation respectively.

• The Office for National Statistics (ONS) has released a public statement on the coronavirus (COVID-19) and production of statistics; Section 8: Strengths and limitations describes the situation in relation to producer price inflation.

• This is the fifth publication of producer price inflation using an annual chain-linked methodology - the headline indices are now published on a gross sector basis; more details on the impact of these improvements can be found in the article Impact of methodological impacts on PPI, which was released on 11 November 2020.

• This is the first month producer price inflation is being published with updated sales data for 2021; the indices are now calculated using the weights from the December 2020 link period (see Section 7: Measuring the Data).

Figure 1 shows input and output Producer Price Indices (PPIs) over the past 10 years. Input producer price inflation is driven mostly by commodity prices, which tend to be more volatile over time compared with prices for finished goods (output producer price inflation). Input producer price inflation is made up of roughly 78% domestic inputs and 22% imported inputs, which are sensitive to exchange rate movements.

The annual rate of inflation for goods leaving the factory gate (output prices) displayed positive growth of 0.9% in February 2021, up from positive growth of 0.1% in January 2021 (Table 1). This is the second month the rate has been positive and the highest the annual rate of output inflation has been since August 2019, with the rate being the same in January 2020. On the month, the rate of output inflation was up 0.6% in February 2021, down from 0.8% in January 2021.

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

Of the 10 product groups, eight provided positive contributions to the output annual rate. Food products provided the largest upward contribution of 0.44 percentage points to the annual rate (Figure 2) and had positive annual price growth of 1.7% in February 2021 (Table 2). This was driven by prepared animal feeds for the domestic market.

The second largest upward contribution of 0.34 percentage points came from other manufactured products (Figure 2), displaying a positive annual price growth of 1.4% in February 2021 (Table 2), driven by products of wood, cork, straw and plaiting materials for the domestic market.

This was closely followed by metals, machinery and equipment, which had the third largest upward contribution at 0.31 percentage points (Figure 2) and had positive annual price growth of 2.1% (Table 2), driven by basic metals for the domestic market.

The component within basic metals for the domestic market with the largest contribution, having an annual growth rate of 14.3% in February 2021 (just 0.8 percentage points being attributable to current month growth) came from basic iron and steel, and of ferro-alloys for the domestic market.

Figure 3 shows movements in the annual growth rate for basic iron and steel, and of ferro-alloys for the domestic market. It also shows the contributions to the annual growth rate from current month price movements and the base effect, which reflect how prices moved a year ago. The base month effect represents the annual growth rate as if the price had not changed from the previous month to the current month (effectively an 11-month growth rate) to show how much of the annual growth rate is being driven by the price level a year earlier, as opposed to current price movements.

The annual growth rate for metals, machinery and equipment was 2.1% in February 2021, the second largest positive price movement of all components to output inflation. This may be because of upward pressures from basic iron and steel, and of ferro-alloys. One of the raw materials used in the production of steel is iron ore. Supply shocks in Brazil (the world's second largest exporter of iron ore) and increased demand from China spurred by stimulus spending have seen prices per dry metric tonne increase by over 80% in the last 12 months, up from US $88 in February 2020 to US $165 in February 2021 according to The World Bank.

Figure 4 shows contributions to the change in the annual rate for factory gate prices (output prices) in February 2021. The annual rate of output inflation was 0.9% in February 2021, up 0.8 percentage points from 0.1% in January 2021.

Of the 10 product groups, four displayed upward contributions to the change in the annual rate, with petroleum products providing the largest upward contribution to the change in the rate at 0.72 percentage points.

Recent price movements in petroleum products are likely to reflect both demand and supply side factors during the ongoing coronavirus (COVID-19) pandemic.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) was 2.6% in February 2021, up from 1.6% in January 2021 (Table 3). This is the third consecutive month the rate has been positive, following 10 consecutive months of negative annual inflation between February 2020 and November 2020. The monthly rate for materials and fuels purchased by manufacturers was 0.6% in February 2021, down 0.4 percentage points from 1.0% in January 2021.

The annual rate of inflation for imported materials and fuels was flat in February 2021 (Table 4), which is down 0.8 percentage points from January 2021 when it was 0.8%. The monthly rate was negative 0.6% in February 2021, down 0.9 percentage points from January 2021 when it was 0.3%.

The sterling effective exchange rate index (ERI) displayed a positive growth of 2.0% on the month in February 2021. On the year, the rate for February 2021 was flat, which is up 1.5 percentage points from negative 1.5% in January 2021. All else being equal, a rise in the value of sterling would be expected to decrease the cost of imports.

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

Of the 10 product groups, six provided positive contributions to the input annual rate. The largest upward contribution came from metals and non-metallic minerals, which contributed 1.64 percentage points (Figure 5) and had positive annual price growth of 7.9% in February 2021 (Table 5). This is the seventh consecutive month the rate has been positive since August 2020, being driven by non-EU imported precious metals.

The second largest upward contribution came from home food materials, which contributed 0.54 percentage points (Figure 5) and had positive annual price growth of 3.9% in February 2021 (Table 5). This is the eighth consecutive month the rate has been positive since July 2020, being driven by products of agriculture, and hunting and related services for the domestic market.

On the month, the largest upward contribution came from metals and non-metallic minerals, which contributed 0.27 percentage points (Figure 5) and had positive monthly price growth of 1.3% (Table 5). This is the 10th consecutive month the rate has been positive, being driven by non-EU imports of precious metals.

The second largest upward contribution came from crude oil, which contributed 0.19 percentage points (Figure 5) and had a positive monthly price growth of 4.0% (Table 5). This is the fourth consecutive month the rate has been positive, being driven by crude petroleum for the domestic market. Recent price movements in crude oil are likely to reflect both demand and supply side factors during the ongoing coronavirus (COVID-19) pandemic.

The third largest upward contribution came from home food materials, which contributed 0.17 percentage points (Figure 5) and had positive monthly price growth of 1.2% (Table 5). This is being driven by live animals and animal products for the domestic market.

Prices for home food materials were up 1.2% and 3.9% on the month and year respectively, partly because of concerns about post-Brexit trade, which led farmers to sell more lambs than usual at the end of 2020. This meant supplies at the beginning of 2021 were scarce, which has worsened in the past month as stocks usually anticipated from New Zealand have failed to come to the domestic market owing to a bad crop season and a shift in volume to Asian Markets.

Figure 6 shows contributions to the change in the annual rate of inflation for materials and fuels purchased by manufacturers (input prices) in February 2021. The annual rate increased by 1.0 percentage points from 1.6% last month to 2.6% this month.

Of the 10 product groups, six displayed upward contributions to the change in the annual rate, with crude oil providing the largest of these at 0.86 percentage points. Other produced materials made the second largest upward contribution to the change in the rate at 0.16 percentage points. The largest downward contribution to the change in the annual rate came from other parts and equipment at negative 0.26 percentage points.

Producer price inflation

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).

Output prices

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.

Input prices

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.

Services producer price inflation

Quarterly estimates monitoring the changes in prices charged for services provided to UK-based customers for a range of industries.

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Producer Price Indices (PPIs) QMI and the Services Producer Price Indices (SPPI) QMI.

Annual chain-linking weights update

As communicated previously, the Producer Price Index (PPI) and Services Producer Price Index (SPPI) are now produced on an annual chain-linking basis. As scheduled, the weights for use alongside 2021 prices have now been updated for PPI and will be next updated in March 2022.

For further information on methodology employed in calculating the weights, please refer to the articles published in July 2020, Chain-linking in business prices.

Table 6 shows the rank changes in the weights for 2021 for Classification of Products by Activity (CPA) categories as grouped under headline output PPI.

The most notable change in rank is that of petroleum, which previously had the second largest weight feeding into PPI. This is due to changes in expenditure sales values as well as inflationary pressures affecting the December 2020 prices, which have been used to price update the new set of weights. This is in line with economic expectations as petroleum and crude oil are volatile in nature. In 2021, the second largest weight is that of manufacture of transport and equipment.

It is important to note that because of the lagged availability of sales data, the weights are calculated using a price updating method where we have used sales from before the coronavirus (COVID-19) pandemic, therefore not reflecting the trends last year.

We will review current methods in time to calculate the new weights for 2022, which will employ the 2020 sales data and ensure our weights are representative of the economic situation. We are also studying the impact of price updating methods and will update users on any methods improvements planned in the future.

Input prices

Currently we do not have time series data pre-dating December 2008 for the headline input prices (gross sector input). To enable users' access to the back data we will investigate a viable option to rectify this. When possible, we will pre-announce when the data will be available in order to give users as much notice as possible.

Producer Price Indices

Index numbers shown in the main text of this bulletin are on a gross sector basis. The gross sector output series measure the prices of products sold by UK manufacturers, irrespective of the classification of the customer who buys the product. Gross sector output indices are calculated at the very detailed, six-digit level.

Indices relate to average prices for a month or quarter. The full effect of a price change occurring part way through any month or quarter will only be reflected in the following period's index.

All figures presented for Producer Price Indices (PPI) are calculated on a gross sector basis unless otherwise stated and 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.

The use of core input inflation removes the more volatile indices of food, tobacco, beverages and petrol from our statistics.\ Each PPI and Services Producer Price Indices (SPPI) 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 and SPPI.

Standard errors for PPI will be produced in spring 2021, which will include standard errors for the periods between 2019 and 2021.

Services Producer Price Indices

The Services Producer Price Indices (SPPI) provides a measure of inflation for the UK services sector. It is constructed from a statutory quarterly survey, which measures changes in the price of services provided to UK-based customers for a range of industries. Individual SPPIs are available, which provide information on price change for a selection of services industries. These individual price indices are also aggregated together to create a services industry SPPI with limited coverage (it does not provide full coverage of the "services sector").

The services sector is estimated to account for around 80% of the UK economy based on its weight in gross domestic product (GDP). We do not produce an index for every industry in the services sector and so the SPPI is a partial, best estimate of the overall inflation to UK businesses in the services sector. The SPPIs presented in this statistical bulletin are estimated to represent 59% of the total services sector at industry level.

Standard errors for SPPI will be produced in spring 2021, which will include standard errors for the quarters between 2019 and 2021.

Guidance

Other useful documentation for the Producer Price Index (PPI) and the Services Producer Price Index (SPPI) are:

• Producer Price Indices methods changes – a comprehensive article outlining the move from net to gross, removal of duty and the sources used to compile the weights required for chain-linking

• Chain-linking in business prices – the methodology and practical implementation of chain-linking

• Producer price weight changes and Services producer price weight changes – articles explaining the impact of introducing chain-linking and the other new methods on weights used in the PPI and SPPI

• Guidance on using indices in indexation clauses (PDF, 197KB) – covers producer prices, services producer prices and consumer prices

• PPI methods and guidance (PDF, 1.18MB) and SPPI user guidance and methodology article - provide an outline of the methods used to produce the PPI and the SPPI as well as information about recent developments

• PPI standard errors article and SPPI standard errors article - more information about the reliability of the data

End of EU exit transition period

As the UK enters into a new Trade and Cooperation Agreement with the EU, the UK statistical system will continue to produce and publish our wide range of economic and social statistics and analysis. We are committed to continued alignment with the highest international statistical standards, enabling comparability both over time and internationally, and ensuring the general public, statistical users and decision makers have the data they need to be informed.

As the shape of the UK's future statistical relationship with the EU becomes clearer over the coming period, the Office for National Statistics (ONS) is making preparations to assume responsibilities that as part of our membership of the EU, and during the transition period, were delegated to the statistical office of the EU, Eurostat. This includes responsibilities relating to international comparability of economic statistics, deciding what international statistical guidance to apply in the UK context and to provide further scrutiny of our statistics and sector classification decisions.

In applying international statistical standards and best practice to UK economic statistics, we will draw on the technical advice of experts in the UK and internationally, and our work will be underpinned by the UK's well-established and robust framework for independent official statistics, set out in the Statistics and Registration Service Act 2007. Further information on our proposals will be made available early this year.

Strengths

• These data provide users with valuable insight into the changes in the process of goods and services bought and sold by UK manufacturers.

• Our data is very comprehensive, covering many products at a much greater level of detail than other surveys.

Limitations

• Some products are produced by only a small number of manufacturers, meaning that there may not be enough manufacturers for a detailed and robust analysis and the sector may be volatile, requiring some estimation.

• The data can be revised for 12 months.

• The data for the latest two months of the Producer Price Index (PPI) and two quarters of the Services Producer Price Index (SPPI) are provisional.

Coronavirus in February 2021

On 23 March 2020, the UK and devolved governments announced official guidance on restrictions on movement for the UK as a result of the coronavirus (COVID-19) pandemic. Data collection for the Producer Price Index (PPI) surveys, including the surveys measuring domestic, import and export prices for February 2021, was via paper questionnaires that were sent to businesses on 21 January 2021, asking to return prices that were applicable on or around 1 February 2021.

Although there has been a gradual reopening of workplaces and premises since May 2020 as a result of the lifting of the government restrictions, the response for the current period for PPI and the Services Producer Price Index (SPPI) was lower in comparison with pre-lockdown months.

For PPI, the response for February 2021 was 75.3%, down from a pre-lockdown 87.4% in February 2020; for SPPI, the response for Quarter 4 (Oct to Dec) 2020 was 74.9%, down from a pre-lockdown 85.8% in Quarter 4 2019. We closely monitor response rates in each publication and use statistical methods to deal with non-response.

We have worked with our business respondents and data suppliers and we have used additional data sources to quality assure the estimates in this publication. These include qualitative information sourced from manufacturing industry respondents to the Business Impact of Coronavirus (COVID-19) Survey (BICS) and anecdotal evidence from responders to both the BICS and/or PPI surveys.

Table 7 shows the response rates to the domestic (PPI), export (Export Price Index (EPI)) and import (Import Price Index (IPI)) price surveys at time of publishing for each reference period. Response rates for the PPI, IPI and EPI show an increase between January 2021 and February 2021.

The low response rates in February 2021 are unlikely to have had a substantial impact on the headline PPI figures. However, the smaller sample sizes are likely to have increased volatility for some of the lower-level indices, particularly among IPIs and EPIs. Revisions are also likely to be larger than usual over the next few months.

Producer prices are normally imputed for non-response by using ratio imputation. The ratio imputation method calculates the growth within an index based on prices that have been returned and then applies it to the last known value for the missing price. This method ensures that if prices for a group of products increase (decrease) from one month to the next, the imputed values for non-respondents in that product group will also increase (decrease) when compared with the last known value.

In a small number of cases, prices may be manually imputed by directly using the latest available price from the latest available period. This method is applied when the nature of the product or previous information from respondents indicate that a price change is unlikely (that is, long-term contracts and fixed listing prices).

These are simple but effective methods, used as a standard internationally (PDF, 5.87MB) and recommended by international organisations specifically for treatment of missing producer prices because of the coronavirus pandemic (PDF, 52KB).

Links to additional ONS sources of coronavirus information

Various articles have been published that help describe the ONS response to how the coronavirus might be seen in our estimates:

• Coronavirus and the effects on UK prices (published 6 May 2020)

• Coronavirus and the impact on output in the UK economy, UK: October 2020 (published 12 March 2021)

• Meeting the challenge of measuring the economy through the COVID-19 pandemic (published 6 May 2020)

• Coronavirus and the effects on UK GDP (published 6 May 2020)

• Real-time turning point indicators: a UK focus (published 27 April 2020)

• Communicating gross domestic product (published 27 April 2020)

Our latest data and analysis on the impact of the coronavirus on the UK economy and population are also available.

The ONS has released a public statement on the coronavirus and the production of statistics, and any specific queries on this can be directed to the Media Relations Office media.relations@ons.gov.uk.