Producer price inflation, UK: March 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 March 2016.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 0.9% in the year to March 2016, compared with a fall of 1.1% in the year to February 2016.

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, rose 0.2% in the year to March 2016, compared with a rise of 0.1% in the year to February 2016.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 6.5% in the year to March 2016, compared with a fall of 8.2% in the year to February 2016.

Core input prices, which exclude purchases from the more volatile food, beverage, tobacco and petroleum industries, fell 2.6% in the year to March 2016, compared with a fall of 3.4% in the year to February 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 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 0.9% in the year to March 2016, compared with a fall of 1.1% 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 0.2% in the same period (Figure A).

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

• factory gate prices fell 0.9%, compared with a fall of 1.1% in the year to February 2016
• core factory gate prices rose 0.2%, compared with a rise of 0.1% in the year to February 2016
• factory gate inflation excluding excise duty fell 0.8%, compared with a decrease of 0.9% in the year to February 2016

Between February and March 2016:

• factory gate prices increased 0.3%, compared with an increase of 0.1% last month
• core factory gate prices increased 0.1% showing no change 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 0.9% in the year to March 2016, compared with a decrease of 1.1% in the year to February 2016. This index has now seen negative movements on the year for 21 consecutive months. The main contribution to the annual rate for March 2016 came from petroleum products. A fall in the price of food products also contributed towards the fall in the output price of manufactured products (Figure B).

Petroleum product prices fell 11.9% in the year to March 2016, compared with a fall of 12.4% in the year to February. This index has now seen year on year falls for 31 consecutive months. The main contributions to the latest fall in the annual rate came from diesel and gas oil, aviation turbine fuel and motor spirit.

Food products fell 1.8% in the year to March 2016, down from a fall of 1.5% in the year to February 2016. The main contributions to this fall came from prepared animal feeds, preserved meat and meat products, and bakery and farinaceous products with prices falling by 4.8%, 1.6% and 2.2% respectively on the year.

The monthly price index saw a rise of 0.3% between February and March 2016, up from a rise of 0.1% last month. Most product groups showed small movements except petroleum products (incl. duty), which provided the largest upward contribution to the monthly rate (Figure C).

Between February and March 2016, petroleum prices rose by 2.8%, compared with a rise of 0.4% between January and February 2016. Increases in the price of diesel and gas oil provided the main upward pressure on this index.

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 0.2% in the year to March 2016, compared with a rise of 0.1% in the year to February 2016. This was driven by an increase in the price of transport equipment.

The monthly index showed an increase of 0.1% between February and March 2016, no change from the previous 2 months. Increases in other manufactured products, chemicals and pharmaceuticals, and metals, machinery and equipment were offset by a fall in the price of computer, electrical and optical products.

Output producer price index contribution to change in rate

The annual percentage rate for the output PPI in March 2016 fell 0.9%, up from a fall of 1.1% last month, resulting in an increase in the annual rate of 0.2 percentage points. This increase was driven by the majority of sections showing small upward contributions, the most significant of which coming from transport equipment (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 March 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 11.3% in January 2016. Other manufactured products show the biggest increase, ranging from rises of 1.8% in July 2015 to 0.3% in March 2015.

Figure E: Output PPI range of movements, March 2015 to March 2016

UK

Source: Office for National Statistics

Notes:

1. nec = not elsewhere classified

Download this image Figure E: Output PPI range of movements, March 2015 to March 2016

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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 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 3.9 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 March 2016 were as follows:

• the total input price index fell 6.5%, compared with a fall of 8.2% in the year to February 2016
• the core input price index saw a fall of 2.6%, compared with a fall of 3.4% in the year to February 2016
• the price of imported materials as a whole (including crude oil) fell 5.5%, compared with a decrease of 6.8% in the year to February 2016

Between February and March 2016:

• the total input price index rose 2.0%, compared with a rise of 0.1% 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 0.2%, compared with an increase of 0.4% 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 6.5% in the year to March 2016, compared with a fall of 8.2% in the year to February 2016. The main downward contributions to the index came from crude oil with smaller, but notable, downward contributions from fuel (incl. climate change levy) and imported metals.

The monthly input index rose 2.0% between February and March 2016, compared with a rise of 0.1% between January and February 2016. This is the largest month on month increase seen in the input index since February 2013, when the index rose 2.5%. Increases were seen in 7 of the 9 groups, by far the most significant was in crude oil, with a notable increase also seen in imported metals (see Table F and Figure H).

Imported metal prices fell 9.0% in the year to March 2016, compared with a fall of 13.5% in the year to February 2016. Although this is a considerable decrease it is the smallest seen in this index since June 2015, when prices also fell 9.0%. The main contribution came from imported products used in the manufacture of other basic metals and casting, which fell 10.4%. 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. 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 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, the increase in imported metal prices of 4.1% between February and March is the largest month on month growth seen in this index since February 2013.

Crude oil annual prices have been falling since October 2013. The index fell 30.6% in the year to March 2016, compared with a decrease of 37.0% in the year to February 2016. The monthly index for crude oil rose 15.7% between February and March 2016, compared with a fall of 2.1% between January and February 2016. This is the largest month on month increase seen in this index since August 2004, when prices rose 16.8%. The main contribution to both the annual and monthly indices came from imported crude petroleum and natural gas, which fell 30.5% in the year to March 2016 but rose 14.8% between February and March 2016.

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

The seasonally adjusted core input price index increased 0.2% between February and March 2016, compared with an increase of 0.4% between January and February 2016. In the year to March 2016, the index fell 2.5% compared with a fall of 3.3% in the year to February 2016.

The unadjusted index fell 2.6% in the year to March 2016, compared with a decrease of 3.4% in the year to February 2016. The monthly index increased 0.7% between February and March 2016, compared with an increase of 0.6% between January and February 2016. This increase in the monthly rate is driven by rises in imported metals and other imported parts and equipment.

Input producer price index contribution to change in rate

The annual percentage rate for the input PPI in March 2016 fell 6.5%, compared with a decrease of 8.2% last month, resulting in a rise in the annual rate of 1.7 percentage points. The most notable upward contribution came from crude oil, which saw prices drop on the year to March, but by less than they did in the year to February (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 March 2015. Crude oil shows the biggest decrease, ranging from falls of 48.6% in August 2015 to 30.6% in both January and March 2016. This is also the widest range of price movements seen in any PPI grouping in this period.

Other home-produced materials shows the biggest increase, ranging from rises of 7.7% in March 2015 to a fall of 0.3% in March 2016.

Figure J: Input PPI range of movements, March 2015 to March 2016

UK

Source: Office for National Statistics

Download this image Figure J: Input PPI range of movements, March 2015 to March 2016

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Input producer prices fell 6.5% in the year to March 2016, compared with an 8.2% decrease in the year to February 2016, continuing the current trend of falling input prices. Output prices also fell in the year to March, which would suggest that lower input costs are feeding into the price of manufacturing goods. Output producer price inflation strengthened slightly from a fall of 1.1% in the year to February 2016, to a fall of 0.9% in the year to March 2016.

The decline in input and output producer prices 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 $108 per barrel in March 2014 to around $57 per barrel in March 2015, and to around $40 per barrel in March 2016. However, oil prices have stabilised and increased in recent months: rising by 18.2% in March 2016 compared with the previous month: the second consecutive month of oil price increases, which may partly reflect a potential production freeze between main oil producers. These recent increases notwithstanding, the fall in the oil price on the year meant that, oil and refined petroleum product prices accounted for 4.8 percentage points of the 6.5% fall in input producer prices in the year to March 2016 and 0.84 percentage points of the 0.9% fall in output producer prices respectively over the same period.

Along with the decrease in oil prices, imported metal prices accounted for a further 0.7 percentage points of the 6.5% fall in input producer price inflation in March 2016. Metal prices have been on a downward trend since 2011, widely attributed to a slowdown in demand-growth from China, the largest consumer of metal commodities. However, imported metal prices increased by 4.1% in March 2016, compared with a 2.0% increase in the previous month.

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 5.1% in the year to March 2016, compared with 3.7% in the year to February 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 these producers raise their prices in turn, then movements in the exchange rate can influence input and output producer prices. Sterling has continued to depreciate against the US dollar, by 4.7% in the year to March 2016, while sterling depreciated against the euro by 7.3% over the same period. Sterling also depreciated by 0.7% against the Chinese Yuan in the year to March 2016.

While lower commodity prices and changes in the exchange rate have had the greatest impact on producer prices, the strengthening of the UK labour market may also be supporting the prices of manufacturers. The unemployment rate amongst those aged 16 and above remained steady at 5.1% in the 3 months to December 2015, while the employment rate amongst those aged 16 to 64 remained at 74.1% during the same period. 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 September) 2015. Despite productivity falling, total weekly earnings have been positive in recent months. Wages in the manufacturing sector grew by 2.2% in the 3 months to January 2016, when compared with the same 3 months a year earlier, which was the largest increase in wages since March 2014. This may have partially offset the lower cost pressures from commodity prices.

With a number of factors affecting input and output prices, the demand for goods and services in the UK economy remained strong in Quarter 4 (October to December) 2015, with GDP revised upwards to 0.6%. However, much of this growth has been concentrated in the services sector, the output of which increased by 0.8% from the previous quarter, while manufacturing output grew by 0.1%, following a decrease of 0.4% in Quarter 3 2015.

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. 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 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)