1. Main points

  • The headline rate of inflation for goods leaving the factory gate (output prices) was 2.4% on the year to March 2018, down from 2.6% in February 2018.

  • Prices for materials and fuels (input prices) rose 4.2% on the year to March 2018, up from 3.8% in February 2018.

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

  • The rate of input annual inflation increased for the first time in four months, despite the second consecutive decrease on the monthly rate.

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2. Things you need to know about this 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 continues to slow, despite monthly prices increasing

The annual rate of inflation for goods leaving the factory gate (output prices) fell slightly by 0.2 percentage points to 2.4% in March 2018 (Table 1). On the month, output prices increased 0.2 percentage points after prices were unchanged in February 2018. 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 0.53 percentage points to the annual rate (Figure 2), driven by price growth of 3.5% on the year to March 2018 (Table 2). Food products annual growth was driven mainly by prices for dairy products, which rose 14.7% on the year. Dairy products annual inflation has been slowing down since its peak of 26.9% in December 2017, with negative monthly inflation recorded for the three months of 2018.

Chemical and pharmaceutical products showed the second-largest upward contribution to the annual rate (0.34 percentage points). The 12-month rate for chemical and pharmaceutical products increased from 4.4% in February 2018 to 4.5% in March 2018, which is the highest annual growth in this sector since May 2017.

The largest upward contribution to the monthly rate of output inflation came from tobacco and alcohol prices, which saw an increase of 1.0 percentage point to 1.1% in March 2018.

The 0.2 percentage points fall in the annual rate between February 2018 and March 2018 was as a result of downward contributions from 6 out of the 10 industries. The largest downward movements came from food products and transport equipment, at 0.09 and 0.07 percentage points respectively. Petroleum products, paper and printing, and chemicals and pharmaceuticals provided small upward contributions, whilst other manufactured products provided no contribution.

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5. Annual inflation rate for materials and fuels bought rose for the first time in four months

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose to 4.2% in March 2018, which is up 0.4 percentage points from February 2018.

The one-month rate for materials and fuels increased by 0.3 percentage points, but remains at a negative 0.1% in March 2018 (Table 3). This is the second consecutive month of negative monthly inflation. This was driven by inputs of crude oil, which fell to a negative 2.2% on the month.

The annual rate of inflation for imported materials and fuels was 2.8% in March 2018 (Table 4), which is down from February 2018 when the annual rate stood at 3.5%. On the month, inflation for imported materials and fuels was down by 0.3%. This is the second consecutive month where the index shows a negative rate on the months. Although the annual rate of growth has been slowing down, imported materials and fuels have shown positive annual inflation for 22 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) rose to 79.2 in March 2018. This is a 0.3% increase compared with February 2018 and it is the seventh consecutive month where the ERI shows positive growth on the month. On the year, the ERI was up 3.4% in March 2018. This is the second-highest annual rate the ERI has shown since moving into positive growth in October 2017. This may influence the slowing of 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 March 2018 came from crude oil, which contributed 1.78 percentage points (Figure 4) and had annual price growth of 11.6% (Table 5), up from 9.1% last month. This rate of annual inflation was driven by a slower decrease in crude oil prices on the month compared with the same period last year. The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas, which rose 10.8% on the year.

Fuel and home food materials provided the second- and third-largest upward contributions to the annual rate, with 1.06 and 0.53 percentage points respectively. Prices for fuel rose 10.0% on the year, while prices for home food materials rose 3.7%.

Crude oil prices were the main driver to the negative monthly input inflation rate, with a downward contribution of 0.46 percentage points, on the back of a price decrease of 2.2% 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 0.4 percentage points increase in the annual rate for inputs between February 2018 and March 2018, with three product groups – fuel, crude oil and other home produced materials – displaying upward contributions to the change in the rate. Fuel provided the largest upward contribution of 0.62 percentage points.

Six industries provided a negative contribution, with other imported parts and equipment displaying the largest downward contribution of 0.18 percentage points. Imported metals and imported chemicals provided the second- and third-largest downward contributions at 0.16 and 0.15 percentage points respectively, whilst the other three 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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Manylion cyswllt ar gyfer y Bwletin ystadegol

Martina Portanti
ppi@ons.gov.uk
Ffôn: +44 (0) 1633 456907