Producer price inflation, UK: June 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 June 2016.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 0.4% in the year to June 2016, compared with a fall of 0.6% in the year to May 2016.

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, rose 0.7% in the year to June 2016, compared with a rise of 0.6% in the year to May 2016.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 0.5% in the year to June 2016, up from a fall of 4.4% in the year to May 2016.

Core input prices, which exclude purchases from the more volatile food, beverage, tobacco and petroleum industries, fell 0.4% in the year to June 2016, compared with a fall of 2.2% in the year to May 2016.

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 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. It 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 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 0.4% in the year to June 2016, compared with a fall of 0.6% in the year to May 2016.

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 0.2% in the same period (Figure A).

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

• factory gate prices fell 0.4%, compared with a fall of 0.6% in the year to May 2016

• core factory gate prices rose 0.7%, compared to a rise of 0.6% in the year to May 2016

• factory gate inflation excluding excise duty fell 0.3%, compared with a fall of 0.6% in the year to May 2016

Between May and June 2016:

• factory gate prices increased 0.2%, unchanged from last month

• core factory gate prices increased 0.1%, unchanged from 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 0.4% in the year to June 2016, compared to a fall of 0.6% in the year to May 2016. This index has now seen negative movements since July 2014. The main contribution to the decrease in the annual rate for June 2016 came from food products. A fall in the price of petroleum, and chemicals and pharmaceuticals also contributed towards the fall in the output price of manufactured products. These falls were offset slightly by increases in the prices of other manufactured products, transport equipment, and tobacco and alcohol (Figure B).

Food products fell 3.2% in the year to June 2016. All food products showed decreases, however, the main contributions to this fall came from preserved meat and meat products, other food products and dairy products with prices falling by 3.5%, 4.6% and 5.3% respectively in the year.

Petroleum product prices fell 6.3% in the year to June 2016, compared with a fall of 9.7% in the year to May 2016. This index has now seen year on year falls since September 2013. All petroleum products showed decreases, however, the main contributions to the latest fall in the annual rate came from diesel and gas oil, motor spirit and aviation turbine fuel.

These decreases were offset slightly by an increase in other manufactured products which increased 1.9% in the year to June 2016, compared to a rise of 1.8% in the year to May 2016. Increases in other manufactured goods, rubber and plastic products and soft drinks, mineral water and other bottled waters contributed to this rise.

The monthly price index saw a rise of 0.2% between May and June 2016, unchanged from last month. Most product groups showed small monthly movements. Petroleum products (including duty) provided the largest upward contribution and food products provided the largest downward contribution to the monthly rate (Figure C).

Between May and June 2016, petroleum prices rose by 3.2%, compared with a rise of 3.3% between April and May 2016. Increases in the price of diesel and gas oil and motor spirit were the main contributors towards this upwards movement.

Food product prices fell by 0.4% between May and June 2016, compared with a fall of 0.7% between April and May 2016. Decreases in the price of dairy products and preserved meat and meat products were the main contributors towards this decrease.

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, rose 0.7% in the year to June 2016, compared to a rise of 0.6% last month. This was driven by increases in the price of other manufactured products, transport equipment and clothing, textiles and leather.

The index showed a rise of 0.1% between May and June 2016, unchanged from last month.

Output producer price index contribution to change in rate

The annual percentage rate for the output PPI in June 2016 fell 0.4%, compared to a fall of 0.6% last month resulting in an increase in the annual rate of 0.2 percentage points. An increase in petroleum products was the main driver behind the increase

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 June 2015. It can be seen that the majority of output PPI indices have experienced little variance in inflation in the past 12 months. Petroleum shows the biggest decrease, as well as the biggest range of movements; ranging from falls of 19.2% in September 2015 to 6.3% in June 2016. Other manufactured products show the biggest increase, ranging from rises of 1.1% in February 2016 to 1.9% in both April and June 2016.

Figure E: Output PPI range of movements

UK, June 2015 to June 2016

Source: Office for National Statistics

Download this image Figure E: Output PPI range of movements

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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 May 2012 and June 2014, 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 0.1 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 June 2016 were as follows:

• the total input price index fell 0.5%, compared with a fall of 4.4% in the year to May 2016

• the core input price index saw a fall of 0.4%, compared with a fall of 2.2% in the year to May 2016

• the price of imported materials as a whole (including crude oil) rose 0.6%, compared with a decrease of 2.8% in the year to May 2016. This is the first rise seen in this index since September 2013.

Between May and June 2016:

• the total input price index rose 1.8%, compared with a rise of 2.2% last month (Table D)

• the seasonally adjusted input price index for the manufacturing industry excluding the food, beverage, tobacco and petroleum industries (see Table D) rose 1.1%, compared with a fall of 0.3% 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 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 0.5% in the year to June 2016, compared with a fall of 4.4% in the year to May 2016. The main downward contributions to the index came from crude oil with smaller, but notable, downward contributions from imports of fuel and imported metals.

The monthly input index rose 1.8% between May and June 2016, compared with an increase of 2.2% between April and May 2016. (see Table F and Figure H).

Crude oil annual prices have been falling since October 2013. The index fell 11.1% in the year to June 2016, compared with a decrease of 20.8% in the year to May 2016. This is the smallest decrease in annual prices since July 2014. The monthly index for crude oil rose 7.5% between May and June 2016, compared with an increase of 10.3% between April and May 2016. This is the 4th consecutive period of month on month growth within a volatile 12 month period that has seen price movements range from an increase of 18.8% in March 2016 to a fall of 15.3% in August 2015. The main contribution to the change in both the annual and monthly indices came from imported crude petroleum and natural gas, which fell 10.6% in the year to June 2016 but rose 7.4% between May and June 2016.

With the exception of one increase in July 2015, fuel prices have been falling for over two years. The index fell 9.7% in the year to June 2016 compared to a decrease of 11.7% in the year to May 2016. The monthly index showed an increase of 1.4% compared to a fall of 4.4% between April and May 2016. The main contributions to both the annual and monthly indices came from gas distribution and electricity production and distribution, which fell 17.5% and 5.0% in the year to June 2016 but rose 3.6% and 0.3% between May and June 2016.

Imported metal prices fell 1.5% in the year to June 2016, compared with a fall of 3.1% in the year to May 2016. This is the smallest decrease seen in this index since February 2015, when prices fell 1.4%. The main contribution came from imported products used in the manufacture of other basic metals and casting, which fell 3.7%, compared with a fall of 7.2% in the year to May 2016. The prices of the majority of metals measured in the PPI have fallen significantly, with many metal market prices ending 2015 at low levels. This may have been contributed to by a reduction in growth in the Chinese economy. Until recently the Chinese economy has seen strong growth resulting in high demand for metals, which may have contributed to increased prices. Reduced demand growth 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. However, this month the index shows a decrease on the monthly index after 5 consecutive months of growth.

Home-produced food prices increased 6.7% in the year to June 2016, compared with a rise of 3.0% last month. This is the second increase on the year after 31 months of consecutive decreases. The main contribution to this movement was from crop and animal production which increased 6.1% in the year to June 2016 and 0.1% between May and June 2016.

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

The seasonally adjusted core input price index fell 0.5% in the year to June 2016, compared with a fall of 2.2% in the year to May 2016. Between May and June 2016 the index increased 1.1%, compared with a fall of 0.3% between April and May 2016.

The unadjusted index fell 0.4% in the year to June 2016, compared with a decrease of 2.2% in the year to May 2016. This is the smallest decrease in this index since October 2013, when prices decreased by 0.2%. The monthly index increased 0.9% between May and June 2016, compared with a decrease of 0.7% between April and May 2016.

Input producer price index contribution to change in rate

The annual percentage rate for the input PPI in June 2016 fell 0.5% compared with a decrease of 4.4% last month, resulting in an increase in the annual rate of 3.9 percentage points. The main upward contribution came from crude oil with smaller contributions from home produced food, other imported parts/equipment and imported food (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 June 2015. Crude oil shows the biggest decrease, ranging from falls of 48.6% in August 2015 to 11.1% in June 2016. This is also the widest range of price movements seen in any PPI grouping in this period.

Imported food shows the biggest increase ranging from falls of 6.3% in June 2015 to rises of 8.1% in June 2016.

Figure J: Input PPI range of movements

UK, June 2015 to June 2016

Source: Office for National Statistics

Download this image Figure J: Input PPI range of movements

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Input producer prices fell 0.5% in the year to June 2016, compared with a 4.4% decrease in the year to May 2016, continuing the current trend of falling input prices albeit at a slower rate. While output producer prices also fell in the year to June 2016 (0.4%), which would suggest lower input costs continue to feed into the output prices of manufactured goods, other factors could also be supporting the output prices of manufacturers. In particular, labour costs may be offsetting some of the fall in input prices, resulting in a more modest fall in output prices.

The decline in input and output producer price inflation can be partly 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. Crude oil prices have been on a downwards trajectory, falling from around $112 per barrel in June 2014 to around $64 per barrel in June 2015, and to around $50 dollars per barrel by June 2016. However, oil prices have stabilized in recent months, rising by 4.5% in June 2016 compared with the previous month – the fifth consecutive month of oil prices increases. According to the International Energy Agency, these short term movements in oil prices could be partly attributed to outages in Nigeria and Canada, as well as the steady decline in US oil production, alongside the expected rise in global oil demand. These recent increases notwithstanding, the fall in the oil price on the year meant that oil and refined petroleum product prices accounted for -1.8 percentage points of the 0.5% fall in input producer prices in the year to June 2016 and -0.5 percentage points of the 0.4% fall in output producer prices over the same period.

Alongside recent changes in commodity prices, changes in the exchange rate may also have had an impact on producer prices. In trade-weighted terms, sterling has depreciated by 7.8% in the year to June 2016, compared with 5.2% in the year to May 2016. All else equal, a depreciation of sterling increases the prices of UK imports, with a corresponding impact on the prices paid by producers for imports. If producers pass on some of the savings from import prices, then movements in the exchange rate can have a bearing on input and output producer prices. The depreciation of sterling in recent months has been down to a combination of economic and financial market factors, including the uncertainty caused by the EU referendum.

While lower commodity prices and the exchange rate have had the greatest impact on producer prices, the strengthening of the UK labour market may also be exerting upward pressure on output prices of manufactures. The unemployment rate amongst those aged 16 and above remained steady at 5.0% in the three months to April 2016, with the employment rate amongst those aged 16 to 64 remained at 74.2% during the same period - which is the highest rate since records began. Unit labour costs in the manufacturing sector – which measures the labour cost per unit of output produced – increased by 1.0% in Quarter 1 (January to March) 2016, compared with a 0.6% increase in the previous quarter (October to December).

Output across the economy increased by 0.4% in Quarter 1 (January to March) 2016, compared to the last quarter (October to December) of 2015. However, output in the manufacturing sector fell by 0.2%, and growth in the fourth quarter of 2015 was subdued at 0.2%. This is further evidence that manufacturing producers may well be having to limit the extent of the pass through from rising input prices as output prices remain much more stable.

For this bulletin, Producer price index dataset Tables 8R and 9R 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. The inclusion of an asterisk (*) would show 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 producer price inflation datasets.

Revision triangle for total output (12 months)

Revision triangle for total output (1 month)

Revision triangle for total input (12 months)

Revision triangle for total input (1 month)