Producer price inflation, UK: October 2017

• The headline rate of inflation for goods leaving the factory gate (output prices) rose 2.8% on the year to October 2017, down from 3.3% in September 2017.
• Prices for materials and fuels (input prices) rose 4.6% on the year to October 2017, down from 8.1% in September 2017.
• Core input inflation was 3.2% on the year to October 2017, which is the lowest it has been since June 2016.

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.

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 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 Standard Industrial Classification code appropriate to the index and a 4-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

Every five years, producer price indices are rebased and weights updated to reflect industry changes.

Figures for the latest two months are provisional and the latest five months are subject to revisions in light of (a) late and revised respondent data and (b) 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.

This month sees the release of the first wave of improvements to the Export Price Index (EPI) sample as outlined in our November 2016 publication. This sees an increase to the sample size and therefore the amount of price information used to calculate our estimates within the Standard Industrial Classification (SIC) divisions 16 to 22, 24 to 27 and 29 to 30. For more information on these improvements please see the article from section 15 of the November 2016 PPI Statistical Bulletin.

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.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell back to 4.6% in October 2017, which is down 3.5 percentage points from September 2017.

The 1-month rate for materials and fuels rose 1.0% in October 2017, which is a 0.8 percentage points increase from 0.2% in September 2017, driven by inputs of crude oil, which was up 3.5% on the month.

The index reached 109.4 in October 2017, which is its highest level since July 2014 when it stood at 109.5, although still below its historic peak of 120.9 in March 2013.

The annual rate of inflation for imported materials and fuels was 4.0% in October 2017 (Table 2), which is down from September 2017 when the annual rate stood at 7.7%. Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight.

Apart from a slight dip in August 2017, the sterling effective exchange rate index (ERI) has remained steady at around 77.0 since June 2017. On the year, the ERI was up 3.5% in October 2017. This is the first annual growth in the rate since January 2016 and may influence the rate for imported materials falling as a strong pound should make importing raw materials cheaper.

Table 3 shows monthly and annual growth rates for input prices by industry and Figure 2 shows contributions by those industries to the monthly and annual rate of input price inflation.

The largest upward contribution to the annual rate in October 2017 came from crude oil, which contributed 1.50 percentage points (Figure 2) on the back of annual price growth of 9.9% (Table 3), however, this is down from 17.4% last month. The upward contribution from crude oil was driven mainly by an annual increase of 10.6% for prices of imported crude petroleum and natural gas.

Home food materials and imported metals provided the second and third largest contributions to the annual rate, with 1.13 and 0.96 percentage points respectively. Prices for home food materials rose 8.1% on the year, while prices for imported metals rose 12.3%.

Crude oil also provided the largest upward contribution to the monthly rate at 0.58 percentage points, which was driven by price growth of 3.5% between September and October 2017. However, between September and October 2016, crude oil saw an increase of 10.5%.

Figure 3 shows contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices).

All industries showed downward contributions to the annual rate in October 2017. Crude oil provided the largest downward contribution of 0.95 percentage points followed by other imported parts and equipment at 0.60 percentage points.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.5 percentage points to 2.8% in October 2017, which is the lowest the index has been since November 2016. This was driven mainly by petroleum, where growth, whilst increasing by 3.9% over the year, has fallen back from 8.2% in the year to September 2017.

The 1-month rate was unchanged at 0.2% in October 2017. The 1-month rate has showed positive growth for all but one month over the past 12 months; in June 2017 the rate was flat.

Table 5 shows monthly and annual growth rates for output prices by industry and Figure 4 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 0.81 percentage points to the annual rate (Figure 4) driven by price growth of 5.4% on the year to October 2017 (Table 5). Growth was driven mostly by prices for dairy products, which rose 21.0% on the year and whose annual rate is the highest it has ever been. For further analyses on food prices please refer to section 6 of the May release and section 4 of the January release.

Computer, electrical and optical products and petroleum products showed the second and third largest upward contributions to the annual rate, with 0.36 and 0.29 percentage points respectively. Computer, electrical and optical products increased 3.0% on the year, while prices for petroleum prices grew by 3.9%.

Food products provided the largest upward contribution to the monthly rate at 0.10 percentage points.

Figure 5 shows contributions to the change in the annual rate for factory gate prices (output prices).

The 0.5 percentage points fall in the rate between September and October 2017 was a result of downward contributions from eight industries, while two remained flat and had no impact on the change. The largest downward contribution of 0.25 percentage points came from petroleum products, which, whilst increasing by 3.9% in the year to October 2017, fell 4.3 percentage points from 8.2% in the year to September 2017.

In addition to the data included within this statistical bulletin, the following detailed datasets are available: Aerospace and electronic cost indices time series data Producer Price Index time series data

Higher, lower and equal movements for each Producer Price Index are shown in the Producer price inflation records: monthly figures.

A summary of the revisions to PPI data are available in the PPI revision triangles:

Producer price inflation revision triangle: total output 12-month (JVZ7)
Producer price inflation revision triangle: total output 1-month (JVZ7)
Producer price inflation revision triangle: total input 12-months (K646)
Producer price inflation revision triangle: total input 1-month (K646)

Other important measures of inflation and prices include the Consumer Prices Index (CPI) and the Services Producer Price Index (SPPI).

The 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 Producer Price Index (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 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 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.