Producer price inflation, UK: January 2016

The price of goods bought and sold by UK manufacturers, as estimated by the producer price index, continued to fall in the year to January 2016. This month shows the smallest decreases in both the output and input prices for the last 13 months.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 1.0% in the year to January 2016, compared with a fall of 1.4% in the year to December 2015.

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, showed no movement in the year to January 2016, compared with an increase of 0.1% in the year to December 2015.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 7.6% in the year to January 2016, compared with a fall of 10.4% in the year to December 2015.

Core input prices, which exclude purchases from the more volatile food, beverage, tobacco and petroleum industries, fell 4.7% in the year to January 2016, compared with a fall of 6.7% in the year to December 2015.

The Producer Price Index (PPI) is a monthly survey that measures the price changes of goods bought and sold by UK manufacturers and provides an important measure of inflation, alongside other indicators such as the Consumer Price Index (CPI) and Services Producer Price Index (SPPI). This statistical bulletin contains a comprehensive selection of data on input and output index series and also contains producer price indices of materials and fuels purchased and output of manufacturing industry by broad sector.

The output price indices measure change in the prices of goods produced by UK manufacturers (these are often called “factory gate prices”).

The input price indices measure change in the prices of materials and fuels bought by UK manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running.

The factory gate price (the output price) is the price of goods sold by UK manufacturers and is the actual cost of manufacturing goods before any additional charges are added, which would give a profit. It includes costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent.

Core factory gate inflation excludes price movements from food, beverage, petroleum, and tobacco and alcohol products, which tend to have volatile price movements. It should give a better indication of the underlying output inflation rates.

The input price is the cost of goods bought by UK manufacturers for the use in manufacturing, such as the actual cost of materials and fuels bought for processing.

Core input inflation strips out purchases from the volatile food, beverage, tobacco and petroleum industries to give an indication of the underlying input inflation pressures facing the UK manufacturing sector.

Factory gate inflation fell 1.0% in the year to January 2016, compared with a fall of 1.4% last month.

During 2012 and 2013, core factory gate inflation tended to run at a lower rate than total output inflation and showed a smaller degree of volatility. This trend changed in 2014, as total output fell into negative inflation: a result of the downward pressures from petroleum, which is excluded from the core measure of inflation. In 2015, total output inflation has remained consistently below core output price inflation, with total output averaging a fall of 1.7% during 2015 and core output averaging growth of 0.1% in the same period. (Figure A)

Looking at the latest estimates (Table A), movements in factory gate prices over the 12 months to January 2016 were as follows:

• factory gate prices fell 1.0%, compared with a fall of 1.4% in the year to December 2015

• core factory gate prices showed no movement, compared with an increase of 0.1% in the year to December 2015

• factory gate inflation excluding excise duty fell 0.8%, compared with a decrease of 1.1% in the year to December 2015

Between December 2015 and January 2016:

• factory gate prices decreased 0.1%, compared with a decrease of 0.3% last month

• core factory gate prices increased 0.1%, compared with an increase of 0.2% last month

Table B shows the annual percentage change in price across all product groups and Figure B shows their contribution to the annual factory gate inflation rate.

Table C shows the monthly percentage change in price across all product groups and Figure C shows their contribution to the month factory gate inflation rate.

Factory gate prices fell 1.0% in the year to January 2016, compared with a decrease of 1.4% in the year to December 2015. This index has now seen negative movements on the year for 19 consecutive months. The main contribution to the annual rate for January 2016 came from petroleum products. Smaller falls in the prices of food products, and chemicals and pharmaceuticals also contributed towards the fall in the output price of manufactured products (Figure B).

The monthly price index saw a fall of 0.1% between December 2015 and January 2016, up from a fall of 0.3% last month. Although most product groups showed small increases, a large downward contribution from petroleum products has led to an overall fall in the monthly rate (Figure C).

Petroleum product prices fell 10.4% in the year to January 2016, up from a fall of 15.0% in the year to December 2015. This month’s fall of 10.4% is the smallest seen in this index since November 2014, when prices decreased by 8.8%. The contributions to this fall in the latest annual rate came from diesel and gas oil, aviation turbine fuel and motor spirit.

Between December 2015 and January 2016, petroleum prices fell 3.4%, compared with a decrease of 3.9% between November and December 2015. Falling prices of diesel and gas oil, and motor spirit were the main contributions to the fall in the monthly index.

Food products fell 2.1% in the year to January 2016, up from a fall of 2.5% in the year to December 2015. The monthly index for food products showed no movement between December 2015 and January 2016, compared with a fall of 0.3% between November and December 2015. The main contributions to the decrease in the annual indices came from dairy products, and preserved meat and meat products, with prices falling by 4.6% and 2.2% respectively on the year.

Core factory gate inflation

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum product prices, giving a measure of the underlying factory gate inflation, showed no movement in the year to January 2016, compared with an increase of 0.1% in the year to December 2015. A fall in the price of chemicals and pharmaceuticals was offset by an increase in prices for other manufacturing products in the annual index.

The monthly index showed an increase of 0.1% between December 2015 and January 2016, compared with an increase of 0.2% between November and December 2015. Transport equipment, other manufacturing products, and chemicals and pharmaceuticals contributed to the increase in the index.Output producer price index contribution to change in rate

The annual percentage rate for the output PPI in January 2016 fell 1.0%, up from a fall of 1.4% last month, resulting in an increase in the annual rate of 0.4 percentage points. The increase was driven by petroleum products (Figure D).

Figure E shows the year on year growth in output PPI by grouping for the latest 2 months and the range of the price changes that have been seen in these sections since January 2015. It can be seen that the majority of output PPI indices have experienced little variance in inflation during 2015. Petroleum shows the biggest decrease, as well as the biggest range of movements; ranging from falls of 20.7% in January 2015 to 10.4% in January 2016. Tobacco and alcohol shows the biggest increase, ranging from rises of 3.6% in January 2015 to 0.0% in January 2016.

Figure E: Output prices PPI by grouping, January 2015 to January 2016

UK

Source: Office for National Statistics

Notes:

1. This chart was updated with January 2016 data on 16 February 2016 at 10:45am.

Download this image Figure E: Output prices PPI by grouping, January 2015 to January 2016

.png (15.0 kB) .xls (29.2 kB)

Figure F shows the annual movements in total input prices (including materials and fuels) and core input prices (excluding purchases from food, beverage, tobacco and petroleum industries) of materials and fuels purchased by the UK manufacturing industry. Between April 2012 and October 2013, both series showed relatively similar movements. From November 2013, both series have been showing a downward trend, with total input prices falling more rapidly. There has been a significant gap in the price movements of total input prices and core input prices since November 2014, however, this gap has been narrowing in recent months. Currently there is a difference of 2.9 percentage points, compared with a maximum of 10.9 percentage points in January 2015.

Looking at the latest data (Table D), the main movements in the year to January 2016 were as follows:

• the total input price index fell 7.6%, compared with a fall of 10.4% in the year to December 2015

• the core input price index saw a fall of 4.7%, compared with a fall of 6.7% in the year to December 2015

• the price of imported materials as a whole (including crude oil) fell 8.2%, compared with a decrease of 10.8% in the year to December 2015 (Reference table 7)

Between December 2015 and January 2016:

• the total input price index fell 0.7%, compared with a fall of 0.3% last month (Table D)

• in seasonally adjusted terms (see Table D), the input price index for the manufacturing industry excluding the food, beverage, tobacco and petroleum industries rose 0.6%, compared with an increase of 1.1% last month

Notes for input prices: summary

1. Input price indices include the Climate Change Levy which was introduced in April 2001.

2. Input price indices include the Aggregate Levy (13.9 Kb Pdf) which was introduced in April 2002.

Table E and Figure G show the percentage change in the price of the main commodities groups over the year and their contributions to the total input index.

Table F and Figure H show the percentage change in the price of the main commodities groups over the month and their contributions to the total input index.

The overall input index for all manufacturing, which measures changes in the price of materials and fuels purchased by manufacturers, fell 7.6% in the year to January 2016, compared with a fall of 10.4% in the year to December 2015. The main downward contributions to the index came from crude oil with a smaller, but notable, downward contribution from imported metals.

Imported metal prices fell 18.6% in the year to January 2016. This is a smaller decrease than that seen in the year to December 2015 (-20.2%), but remains one of the largest decreases since records began in 1997. The main contribution came from imported products used in the manufacture of other basic metals and casting, which fell 19.3%. The price of the majority of metals measured in the PPI have fallen significantly, with many metal market prices ending the year at low levels. This may have been contributed to by a reduction in growth in the Chinese economy. The PPI imported metals index is currently at levels not seen since 2006. Until recently the Chinese economy has seen strong growth resulting in high demand for metals, which may have contributed to increased prices. Reduced demand resulting from a slowdown of China’s economy may have been a factor in reducing prices, alongside uncertainty about growth prospects in a number of emerging economies.

The monthly input index fell 0.7% between December 2015 and January 2016, compared with a fall of 0.3% between November and December 2015. This fall was driven by decreases in the price of crude oil, slightly offset by small increases in the price of 6 of the 9 groups (see Table F and Figure H).

Crude oil annual prices have been falling since October 2013. The index fell 31.2% in the year to January 2016, compared with a decrease of 35.2% in the year to December 2015. This is the smallest decrease seen in the annual index since November 2014. The monthly index for crude oil fell 12.6% between December 2015 and January 2016, compared with a fall of 10.3% between November and December 2015. The main contribution to both the annual and monthly indices came from imported crude petroleum and natural gas, which fell 31.7% in the year to January 2016 and 13.5% between December 2015 and January 2016.

Factors in the supply side of the market may have put downward pressure on prices. During 2015 international oil supply increased by 2.6 million barrels per day, alongside stock levels reaching record highs; according to the Joint Organisations Data Initiative (JODI). Uncertainty about the growth of emerging economies may also have contributed towards a drop in prices.

Core input price index (excluding purchases from the food, beverage, tobacco and petroleum industries)

The seasonally adjusted core input price index increased 0.6% between December 2015 and January 2016, compared with an increase of 1.1% between November and December 2015. In the year to January 2016, the index fell 4.8% compared with a fall of 6.6% in the year to December 2015.

The unadjusted index fell 4.7% in the year to January 2016, compared with a decrease of 6.7% in the year to December 2015. The monthly index increased 0.8% between December 2015 and January 2016, compared with an increase of 1.1% between November and December 2015. This increase in the monthly rate is driven by rises in other imported parts and equipment, imported chemicals and other imported materials.

Input producer price index contribution to change in rate

The annual percentage rate for the input PPI in January 2016 fell 7.6%, compared with a decrease of 10.4% last month, resulting in an increase in the annual rate of 2.8 percentage points. Most product groups saw small increases, except for other home-produced materials; which saw a small decrease. The most significant contribution came from crude oil, which saw prices fall on the year; but by less than in the year to December 2015. (Figure I).

Figure J shows the year on year growth in input PPI by grouping for the latest 2 months and the range of the price changes that have been seen in these groupings since January 2015. It can be seen that the majority of input PPI indices have experienced little variance in inflation during 2015. Crude oil shows the biggest decrease, ranging from falls of 48.5% in January 2015 to 31.2% in January 2016. Other home-produced materials shows the biggest increase, ranging from rises of 7.7% in March 2015 to 0.4% in January 2015.

Imported metals has shown the largest range of price changes, ranging from 2.2% in January 2015 to -20.5% in November 2015.

Figure J: Input prices PPI by grouping, January 2015 to January 2016

UK

Source: Office for National Statistics

Download this image Figure J: Input prices PPI by grouping, January 2015 to January 2016

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Input producer prices fell 7.6% in the year to January 2016, following a 10.4% decrease in the year to December 2015, continuing the current trend of falling input prices. Output prices also fell in January, which would suggest that lower input costs are feeding into the price of manufacturing goods. Output producer price inflation rose slightly from -1.4% in the year to December 2015, to -1.0% in the year to January 2016.

The decline in input and output producer price inflation can mostly be attributed to lower oil and petroleum prices, as the cost of crude oil, energy and refined petroleum products has continued to influence the price of manufactured goods. Since the start of 2014, Brent crude oil has fallen sharply from around $108 per barrel to around $48 per barrel in January 2015, and is now $31 per barrel in January 2016. This significant fall in crude oil prices can be partly attributed to weaker global demand, while the supply of oil continues to remain robust in both the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries. As a result, oil and refined petroleum product prices accounted for 4.2 percentage points of the 7.6% fall in input producer prices in the year to January 2016, and for 0.7 percentage points of the 1.0% fall in output producer prices over the same period.

Along with the fall in oil prices, imported metal prices accounted for a further 1.4 percentage points of the 7.6% fall in input producer price inflation in January 2016. Metal prices have been on a downward trend since 2011, following a slowdown in demand from China, the leading consumer of metal commodities. As a consequence, metal commodities such as iron ore, copper and aluminium have seen prices fall by 39%, 23% and 18% (prices sourced from International Monetary fund (IMF)) respectively in the year to January 2016.

Alongside recent changes in commodity prices, changes in the dollar-sterling and euro-sterling exchange rates may also have an impact on producer prices. In trade weighted-terms, the sterling had appreciated in value by 1.0% in the year to January 2016. All else remaining equal, a stronger value of the sterling would reduce the price of imports into the UK, with a corresponding impact on the prices paid by producers for imports. However, movements in the trade-weighted exchange rate could hide the continuing changes in the dollar-sterling and euro-sterling exchange rates in particular. sterling had depreciated by 5.0% against the US dollar in the year to January 2016, but has appreciated against the euro by 1.6% over the same period, so there may be some offsetting pressures from these 2 areas.

While lower commodity prices and changes in the sterling exchange rate have had the largest impact on producer prices, the UK’s labour market has continued to improve over the last year. Employment growth remains strong, as the unemployment rate amongst those aged 16 and above fell to 5.1% in the 3 months to November 2015, its lowest rate since January 2006. Average hours worked in the manufacturing industry had also recovered much of the ground lost during the economic downturn, and output per hour worked in manufacturing, growth in which permits firms to produce more output per unit of labour input fell by 2.0% in the year to Quarter 3 (July to Sept) 2015. Despite productivity falling, total weekly earnings have been positive in recent months; wages grew by 1.3% in the 3 months to November 2015 when compared with the same t3 months a year earlier. Taken together, unit wage costs rose by a strong 4.6% in the year to Quarter 3 2015. This may have partially offset the lower cost pressures from commodities.

With a number of factors pulling down input and output prices, the demand for goods and services in the UK economy remained strong in Quarter 4 (Oct to Dec) 2015, as GDP grew by 0.5% compared with 0.4% in Quarter 3 2015, which would indicate an increase in inflationary pressure. However, much of this growth had been concentrated in the services sector, which had increased by 0.7% from the previous quarter, while manufacturing output remained flat, following a decrease of 0.4% in Quarter 3 2015.

For this bulletin (Reference tables 8R and 9R (235.5 Kb Excel sheet)) highlight revisions to movements in price indices previously published in last month’s statistical bulletin. These are mainly caused by changes to the most recent estimates, as more price quotes are received, and revisions to seasonal adjustment factors, which are re-estimated every month.

For more information about our revisions policy, see our website.

Revisions to data provide one indication of the reliability of main indicators. Table G shows summary information on the size and direction of the revisions which have been made to the data covering a 5-year period. A statistical test has been applied to the average revision to find out if it is statistically significantly different from zero. An asterisk (*) shows that the test is significant.

Table G presents a summary of the differences between the first estimates published between 2011 and 2015 and the estimates published 12 months later. These numbers include the effect of the reclassification onto Standard Industrial Classification (SIC) 2007.

Spreadsheets giving revisions triangles of estimates for all months from February 1998 through to December 2015 and the calculations behind the averages in the table are available in the reference table area of our website:

Revision triangle for total output (12 months) (2.57 Mb Excel sheet)

Revision triangle for total output (1 month) (2.52 Mb Excel sheet)

Revision triangle for total input (12 months) (2.55 Mb Excel sheet)

Revision triangle for total input (1 month) (2.56 Mb Excel sheet)