Producer price inflation, UK: October 2020

• This is the first publication of producer price inflation using an annual chain linked methodology; the headline indices are now published on a gross sector basis, and more details on the impact of these improvements can be found in Impact of methodological improvements on Producer Price Inflation, released 11 November 2020.
• The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to October 2020, up from negative growth of 1.7% in September 2020.
• The price for materials and fuels used in the manufacturing process showed negative growth of 1.3% on the year to October 2020, up from negative growth of 2.2% in September 2020.
• Petroleum products and crude oil were the largest downward contributors to the annual rate of output inflation and input inflation respectively.
• The Office for National Statistics (ONS) has released a public statement on the coronavirus (COVID-19) and production of statistics; Section 7: Measuring the data describes the situation in relation to producer price inflation.

Figure 1 shows input and output Producer Price Indices (PPIs) over the past 10 years. Input producer price inflation is driven mostly by commodity prices, which tend to be more volatile over time, compared with prices for finished goods (output producer price inflation). Input producer price inflation is made up of roughly 78% domestic inputs and 22% imported inputs, which are sensitive to exchange rate movements.

The annual rate of inflation for goods leaving the factory gate (output prices) displayed negative growth of 1.4% in October 2020, up from negative 1.7% in September (Table 1). This is the eighth consecutive month that the rate has been negative, following 43 consecutive months of positive annual inflation between August 2016 and February 2020.

On the month, the rate of output inflation was flat in October 2020; this follows two consecutive months of small negative growth.

Figure 2 shows contributions by product group to the monthly and annual rate of output inflation, and Table 2 shows monthly and annual growth rates by product group.

Of the 10 product groups, five provided negative contributions to the output annual rate.

Petroleum provided the largest downward contribution of 2.19 percentage points to the annual rate (Figure 2) and had negative annual price growth of 35.7% on the year to October 2020 (Table 2). This is the ninth consecutive month that the annual rate for petroleum has been negative since February 2020. The negative rate in October 2020 was driven by petroleum products for the domestic market.

Metals, machinery and equipment provided the second largest downward contribution of 0.74 percentage points, and chemicals and pharmaceuticals provided the third largest downward contribution of 0.35 percentage points to the annual rate.

Figure 3 shows contributions to the change in the annual rate for factory gate prices (output prices) in October. Of the 10 product groups, nine displayed upward contributions to the change in the annual rate, with other manufactured products providing the largest upward contribution to the change in the rate at 0.14 percentage points. Within this product group, the contribution was mainly driven by non-metallic mineral products. Only outputs of food displayed a downward contribution to the change in the annual rate at 0.05 percentage points.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose to negative 1.3% in October 2020, from negative 2.2% in September 2020 (Table 3). This is the ninth consecutive month the annual rate has been negative.

The monthly rate for materials and fuels purchased by manufacturers slowed to 0.2% in October 2020, down from 0.3% in September 2020.

The annual rate of inflation for imported materials and fuels was negative 0.8% in October 2020 (Table 4), which is up by 1.5 percentage points from September 2020 when it was negative 2.3%. The monthly rate was 0.1% in October 2020, down by 0.8 percentage points from 0.9% in September 2020.

The sterling effective exchange rate index (ERI) displayed a positive growth of 0.3% on the month in October 2020. On the year, the ERI showed negative growth of 0.9% in October 2020, which is down by 1.8 percentage points from 0.9% in September 2020.

All else being equal, a fall in the value of sterling would be expected to increase the cost of imports.

Figure 4 shows contributions by product group to the monthly and annual rate of input inflation, and Table 5 shows monthly and annual growth rates by product group.

Of the nine product groups, four provided negative contributions to the input annual rate. The largest downward contribution to the annual rate came from crude oil, which contributed 1.89 percentage points (Figure 4) and negative annual price growth of 33.4% (Table 5). This is the ninth month of negative growth and was driven by domestic inputs into the extraction of crude petroleum, natural gas and the mining of metals ores.

Recent price movements in crude oil are likely to reflect both demand and supply side factors during the ongoing coronavirus (COVID-19) pandemic. The continued negative growth in crude oil price was likely driven by a combination of reduced demand as COVID-19 cases increased in many countries, prompting further lockdowns and travel restrictions, as well as increased supply as Organization of the Petroleum Exporting Countries (OPEC) output increased.

The second largest downward contribution to the annual rate came from other produced materials, with a contribution of 0.38 percentage points and annual price growth of negative 3.8%. This is the 13th consecutive month of negative growth for this product group and has been driven by domestic inputs of coke and refined petroleum products.

Figure 5 shows contributions to the change in the annual rate of inflation for materials and fuels purchased by manufacturers (input prices) in October. The annual rate increased by 0.9 percentage points from negative 2.2% last month to negative 1.3% this month. Of the 10 product groups, eight displayed upward contributions to the change in the annual rate, with crude oil providing the largest upward contribution to the change in the annual rate at 0.2 percentage points. Despite crude oil falling 0.9% between September and October, it fell by a greater amount at 4.0% between the same period last year resulting in an upward contribution to the change in the annual rate. Other parts and equipment made the second largest upward contribution to the change in the rate at 0.17 percentage points. The only negative contribution came from fuels at 0.03 percentage points, while inputs of beverages and tobacco did not contribute in either way.

Producer price inflation

Producer price inflation refers to changes in the prices of goods bought and sold by UK manufacturers including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices).

Output prices

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.

Input prices

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 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.

Services producer price inflation

Services producer price inflation refers to quarterly estimates monitoring the changes in prices charged for services provided to UK-based customers for a range of industries.

Input prices

Currently, we do not have time series data pre-dating December 2008 for the headline input prices (gross sector input). To enable users’ access to the back-data, we will investigate a viable option to rectify this. When possible, we will pre-announce when the data will be available to give users as much notice as possible.

Producer Price Indices (PPIs)

Index numbers shown in the main text of this bulletin are on a gross sector basis. The gross sector output series measure the prices of products sold by UK manufacturers, irrespective of the classification of the customer who buys the product. Gross sector output indices are calculated at the very detailed, six-digit level.

Indices relate to average prices for a month or quarter. The full effect of a price change occurring part way through any month or quarter will only be reflected in the following period’s index.

All figures presented for producer price inflation are calculated on a gross sector basis unless otherwise stated, and all index numbers exclude Value Added Tax (VAT). The Soft Drinks Industry Levy, introduced in April 2018, is also excluded. Excise Duty (on cigarettes, manufactured tobacco, alcoholic liquor and petroleum products) is included, except where labelled otherwise.

The use of core input inflation removes the more volatile indices of food, tobacco, beverages and petrol from our statistics.

Each Producer Price Index (PPI) and Services Producer Price Index (SPPI) has two unique identifiers: a 10-digit index number, which relates to the Standard Industrial Classification (SIC) 2007 code appropriate to the index, and a four-character alpha-numeric code (series ID), which can be used to find series when using the time series dataset for producer price inflation and services producer price inflation.

Services Producer Price Indices (SPPIs)

The SPPI provides a measure of inflation for the UK services sector. It is constructed from a statutory quarterly survey that measures changes in the price of services provided to UK-based customers for a range of industries. Individual SPPIs are available, which provide information on price changes for a selection of services industries. These individual price indices are also aggregated together to create a services industry SPPI with limited coverage (it does not provide full coverage of the “services sector”).

The services sector is estimated to account for around 80% of the UK economy based on its weight in gross domestic product (GDP). We do not produce an index for every industry in the services sector, and so the SPPI is a partial, best estimate of the overall inflation to UK businesses in the services sector. The SPPIs presented in this statistical bulletin are estimated to represent 59% of the total services sector at industry level.

For more information regarding how the output was created, please see the PPIs QMI and SPPI QMI.

Other useful documentation for the PPI and SPPI are:

• PPIs methods changes – comprehensive article outlining the move from net to gross, removal of duty and the sources used to compile the weights required for chain-linking
• Chain-linking in business prices – the methodology and practical implementation of chain-linking
• Producer price weight changes and Services producer price weight changes – article explaining the impact of introducing chain-linking and the other new methods on weights used in the PPI and SPPI
• Guidance on using indices in indexation clauses (PDF, 197KB) – covers producer prices, services producer prices and consumer prices
• PPI methods and guidance (PDF, 1.18MB) and SPPIs user guidance and methodology – provides an outline of the methods used to produce the PPI and SPPI as well as information about recent developments
• PPI standard errors: 2017 and UK SPPI standard errors: 2016 to 2017 – more information about the reliability of the data

After EU withdrawal

As the UK leaves the EU, it is important that our statistics continue to be of high quality and are internationally comparable. During the transition period, those UK statistics that align with EU practice and rules will continue to do so in the same way as before 31 January 2020.

After the transition period, we will continue to produce our inflation statistics in line with the UK Statistics Authority’s Code of Practice for Statistics and in accordance with internationally agreed statistical guidance and standards.

Coronavirus (COVID-19)

Various articles have been published that help describe the Office for National Statistics (ONS) response to how the coronavirus (COVID-19) might be seen in our estimates:

• Coronavirus and the effects on UK prices (published 6 May 2020)
• Coronavirus and the impact on output in the UK economy, UK: September 2020 (published 12 November 2020)
• Meeting the challenge of measuring the economy through the COVID-19 pandemic (published 6 May 2020)
• Coronavirus and the effects on UK GDP (published 6 May 2020)
• Real-time turning point indicators: a UK focus (published 27 April 2020)
• Communicating GDP (published 27 April 2020)

Our latest data and analysis on the impact of the coronavirus on the UK economy and population are also available.

The ONS has released a public statement on the coronavirus and the production of statistics, and any specific queries on this can be directed to the Media Relations Office.

The strengths of the producer price inflation bulletin include:

• these data provide users with valuable insight into the changes in the process of goods and services bought and sold by UK manufacturers
• our data are very comprehensive, covering many products at a much greater level of detail than other surveys

The limitations of the producer price inflation bulletin include:

• some products are produced by only a small number of manufacturers, meaning that there may not be enough manufacturers for a detailed and robust analysis and the sector may be volatile, requiring some estimation
• the data can be revised for 12 months
• the data for the latest two months of producer price inflation and two quarters of services producer price inflation are provisional

Coronavirus in October 2020

On 23 March 2020, the UK and devolved governments announced official guidance on restrictions on movement for the UK as a result of the coronavirus (COVID-19) pandemic. Data collection for the Producer Price Index (PPI) surveys, including the surveys measuring domestic, import and export prices for October 2020, was via paper questionnaires that were sent to businesses on 24 September 2020, asking to return prices that were applicable on or around 1 October 2020; data collection for the Services Producer Price Index (SPPI) survey for Quarter 3 (July to Sept) 2020 was via paper questionnaires that were sent to businesses on 14 July 2020, asking to return prices that were applicable for July 2020.

Although there has been a gradual reopening of workplaces and premises since May 2020 as a result of the lifting of the government restrictions, the response for the current period for the PPI and SPPI was lower in comparison with pre-lockdown months. For the PPI, the response for October 2020 was 77.2%, down from a pre-lockdown 87.4% in February 2020; for the SPPI, the response for Quarter 3 2020 was 75.3%, down from a pre-lockdown 85.8% in Quarter 4 (Oct to Dec) 2019. We closely monitor response rates in each publication and use statistical methods to deal with non-response.

We have worked closely with our business respondents and data suppliers, and we have used additional data sources to quality assure the estimates in this publication. These include qualitative information sourced from manufacturing industry respondents to the Business Impact of Coronavirus (COVID-19) Survey (BICS) and anecdotal evidence from responders to both the BICS and/or PPI surveys.

Table 6 shows the response rates to the domestic (PPI), export (Export Price Index (EPI)) and import (Import Price Index (IPI)) price surveys at the time of publishing for each reference period. Response rates for the PPI, EPI and IPI show small decreasing between September and October 2020.

The low response rates in October 2020 are unlikely to have had a substantial impact on the headline PPI figures. However, the smaller sample sizes are likely to have increased volatility for some of the lower-level indices, particularly among IPIs and EPIs. Revisions are also likely to be larger than usual over the next few months.

Table 7 shows the response rates to the SPPI survey at the time of publishing for each reference period. The response rates for the SPPI show there was a fall of around 1.3 percentage points in Quarter 3 2020 compared with Quarter 2 (Apr to June) 2020.

Producer prices are normally imputed for non-response by using ratio imputation. The ratio imputation method calculates the growth within an index based on prices that have been returned and then applies it to the last known value for the missing price. This method ensures that if prices for a group of products increase (decrease) from one month to the next, the imputed values for non-respondents in that product group will also increase (decrease) when compared with the last known value.

In a small number of cases, prices may be manually imputed by directly using the latest available price from the latest available period. This method is applied when the nature of the product or previous information from respondents indicate that a price change is unlikely (that is, long-term contracts and fixed listing prices).

These are simple but effective methods, used as a standard internationally (PDF, 5.87MB) and recommended by international organisations specifically for treatment of missing producer prices because of the coronavirus pandemic (PDF, 52KB).