Services producer price inflation, UK: October to December 2014

• The price of services sold by UK companies, as estimated by the aggregate Services Producer Price Index, increased 0.4% in the year to quarter 4 of 2014, compared with an increase of 1.4% in the year to quarter 3 of 2014

• Between quarter 3 and quarter 4 of 2014 the aggregate SPPI fell 0.1%, compared with an increase of 0.1% between quarter 2 and 3

• Professional, Scientific & Technical Activities and Transportation & Storage made the greatest upward contributions to the annual rate of inflation, partially offset by a fall in prices for Information and Communication Services

• Real Estate Activities showed the largest increase in prices with prices increasing by 3.5% in the year to quarter 4 of 2014

The Services Producer Price Index (SPPI) provides a measure of inflation for the UK service sector. It is constructed from a statutory quarterly survey which measures changes in the price received for selected services provided by UK businesses to other UK businesses and government. Individual SPPIs are available which provide information on price change for a selection of service industries. These individual price indices are also aggregated together to create a service industry SPPI with limited coverage (it does not provide full coverage of the 'service sector').

The primary use of the SPPI is as a deflator in the UK National Accounts. However, it is also important as an inflationary measure to inform monetary policy and to account for inflation in long-term service procurement contracts. For more information on the use made of SPPI please see the separate document Users of Services Producer Price Indices data (67.2 Kb Pdf).

The figures presented in this Statistical Bulletin are considered provisional for the latest two quarters (quarter 3 and quarter 4 of 2014) and may be revised as late data is received.

None of the indices presented in this Bulletin are seasonally adjusted.

Coverage of SPPI

The service sector currently accounts for around 78% of the UK economy based on its weight in Gross Domestic Product (GDP). ONS does not currently produce an SPPI for every industry in the service sector and so the aggregate SPPI is a partial, best estimate, of the overall inflation to UK businesses in the service sector. Currently, ONS estimates that the SPPIs presented in this statistical bulletin represent 59% of the total service sector at industry level. The SPPI's coverage of the service sector at SIC class, division and section level is available in the SPPI Coverage Document. As resources allow, ONS will continue to review the existing SPPIs and expand coverage through developing SPPIs for new industries. As such, the aggregate SPPI will change composition from time to time but will always remain ONS' best estimate of inflation in the UK service sector. The fact that coverage may change over time should be considered by users when deciding which indices best meet their needs.

Newly developed SPPIs

A development project to increase the industrial coverage of the SPPI took place between 2009 and 2012 and has resulted in the development of eight new SPPIs. These are:

• accountancy services

• legal services

• architectural services

• engineering services

• cargo handling services

• advertising services

• business management consultancy

• storage and warehousing

Since their development, these indices have been published as experimental series. Since the 2013 Q4 release, these indices are no longer published separately but are instead included in this release and make up part of the aggregate SPPI. The inclusion of these new indices has changed the composition of the aggregate SPPI, increasing the coverage of the service industry and improving the measure. Further information about the impact of adding these new indices to the aggregate can be found in the 2013 Q4 Statistical Bulletin.

All of the statistics contained in this release are official statistics. However, since these newly developed series have not yet undergone a full assessment against the Code of Practice for Official Statistics by the UK Statistics Authority they cannot currently be labelled as National Statistics.

Between mid 2005 and mid 2008, the annual rate of inflation in the service sector, as estimated by the aggregate SPPI, rose steadily from an annual rate of 1.3% in quarter 2 of 2005 to a peak of 3.7% during quarters 1 and 2 of 2008. At the end of 2008, the rate of inflation fell rapidly, from annual inflation of 3.6% in quarter 3 of 2008 to deflation (prices lower than they were in the same quarter of the previous year) of 1.6% in quarter 3 of 2009.

The annual rate of inflation began to increase at the end of 2009, reaching its post-economic downturn high of 1.8% in quarter 2 of 2010. Since mid 2010, inflation has tended to remain relatively steady at around 1%. In quarter 4 of 2014, prices increased by 0.4%, this is the smallest increase in prices seen since the economic downturn of 2008/09 (Figure A).

Looking at the latest estimates (Table A) of the aggregate SPPI for quarter 4 of 2014, the main movements were as follows:

• Prices charged by UK service providers increased 0.4% in the year to quarter 4 of 2014, down from an increase of 1.4% in quarter 3 of 2014

• The main upward contributions to the annual rate came from increases in the prices charged for Professional, Scientific & Technical Activities and Transportation & Storage services but these were partially offset by falls in the price of Information & Communication services

• Service prices fell 0.1% between quarter 3 and quarter 4 of 2014, compared with an increase of 0.1% between quarter 2 and 3 of 2014

• The main downward contribution to the quarterly rate of inflation came from Accommodation & Food

• Real Estate Activities showed the greatest increase in prices, with prices up 3.5% in the year to quarter 4 of 2014 compared with an increase of 3.1% last quarter

The aggregate SPPI increased by 0.4% in the year to quarter 4 of 2014, down from a rise of 1.4% in the year to quarter 3 of 2014. Of the ten sections (as defined by the Standard Industrial Classification) that are combined to form the aggregate SPPI, six showed price increases.

The main upward contributions to the annual rate of the aggregate SPPI came from Professional, Scientific & Technical Activities, which increased 1.6% in the year to quarter 4 of 2014 (up slightly from an increase of 1.5% last quarter) and Transportation & Storage, which increased by 2.0% in the year to quarter 4 of 2014 (up from a rise of 1.4% last quarter). These increases were partially offset by a fall in the price of Information & Communication services where prices fell by 1.8% in the year to quarter 4 of 2014 (down from there being no movement last month) and Accommodation & Food where prices decreased 3.1% in the year to quarter 4 of 2014 (down from an increase of 5.2% last quarter). (Table B and Figure B).

Real Estate Activities showed the largest increase in prices (Table B), with an annual rate of inflation of 3.5% in quarter 4 of 2014, up from a rate of 3.1% last quarter.

The main upward contribution to the aggregate SPPI came from Professional, Scientific & Technical Activities where prices increased by 1.6% in the year to quarter 4 of 2014. This was mainly caused by an increase in the prices charged by UK business for Accountancy services. Accountancy services prices increased by 4.0% in the year to quarter 4 of 2014, compared with an increase of 3.6% last quarter. This increase is mainly a result of Audit & Assurance services where prices have increased by 3.7% in the year to quarter 4 of 2014, up slightly from an increase of 3.6% last quarter. Sufficient demand for these services has meant that Accountancy companies have felt able to increase the prices they charge to their clients at the end of 2014.

An increase in prices for Transportation & Storage also had a notable upward contribution to the annual rate of inflation seen in the aggregate SPPI. Prices increased by 2.0% in the year to quarter 4 of 2014, up from an increase of 1.4% last quarter. This was caused mainly by an increase in the price of Business Air Fares, where prices increased by 5.1% in the year to quarter 4 of 2014, up slightly from an increase of 3.8% last quarter (Figure C), as a result of increases in long-haul, European and domestic fare prices. Price increases for National Post Parcels (up 4.6% in the year to quarter 4 of 2014, unchanged from last quarter) and Commercial Vehicle Ferries (up 12.5% in the year to quarter 4 of 2014, down from 13.1% last quarter) also made a significant contribution to the annual rate of inflation seen for Transportation & Storage Services.

The increases seen in Professional, Scientific & Technical Activities and Transportation & Storage were partially offset by a fall in the prices charged for Information & Communication services where prices fell 1.8% in the year to quarter 4 of 2014, down from there being no movement in price seen last quarter. This is mainly a result of a fall in prices for Telecommunications where prices fell by 8.3% in the year to quarter 4 of 2014, down from a fall of 2.4% last quarter. The falling cost of mobile phone calls, in particular when roaming abroad, has contributed to this increase.

Real Estate Activities prices increased by 3.5% in the year to quarter 4 of 2014, up from an increase of 3.1% last quarter. This was caused by an increase in the fees received by Estate Agents, which rose by 8.9% in the year to quarter 4 of 2014, up from an increase of 8.0% in the year to quarter 3 2014. Price rises were mainly seen for the service of letting offices and were as a result of increases in property values rather than an increase in the percentage fee charged by the Estate Agent (Figure D).

Examining inflation for each of the sections that are combined to form the aggregate SPPI reveals a diverse set of trends. Figure E shows both the range of annual inflation rates experienced by each of the sections since Q4 of 2010 and the annual rate of inflation for the two most recent quarters. Looking at the most recent quarters, eight of the ten sections saw a fall in the annual inflation rate between Q3 and Q4 2014, suggesting that the fall in the aggregate SPPI inflation in Q4 2014 was widely based. In addition, four of the sections now stand at a four year low, while around eight of the industries have relatively low inflation compared to recent experiences, mirroring the relative low of the headline figure of 0.4%.

Figure E: Services Producer Price Index by Section

United Kingdom

Source: Services Producer Price Index (SPPI) - Office for National Statistics

One long-term trend is the difference across sections in the range of inflation rates experienced since 2010 Q4. Education, Accommodation & Food, and Water Supply, Sewerage, & Waste Management have experienced a relatively wide range of inflation rates over this period. Although all sections have experienced some variance in inflation, certain industries have experienced inflation consistently higher than others. Wholesale, Retail Trade & Repair of Motor Vehicles and Motorcycles has not experienced inflation lower than 1.7% at any point in the past four years, while Other Services, Administrative and Support Services, and Information & Communication have not experienced inflation higher than 1.5%.

Prices received for the services included in the aggregate SPPI fell 0.1% between quarter 3 and 4 of 2014, down from an increase of 0.1% seen between quarter 2 and 3. Of the ten sections that make up the aggregate SPPI, half showed a fall in prices between quarter 3 and quarter 4 of 2014.

The main contribution to the negative quarterly rate came from Accommodation & Food, which fell by 2.4% between quarter 3 and quarter 4 of 2014. This was partially offset by an increase in prices for Professional, Scientific & Technical Activities which increased by 0.4% between quarter 3 and quarter 4 of 2014 (Table C and Figure F).

Accommodation & Food prices fell 2.4% between quarter 3 and 4 of 2014, compared with a fall of 0.4% last quarter. The main contribution to the current quarterly rate came from Hotel prices which fell 4.7%, compared with a decrease of 0.3% between quarter 2 and quarter 3 of 2014. This was as a result of less demand for conferencing facilities (Figure G).

This decrease was partially offset by a rise in prices for Professional, Scientific & Technical Activities where prices increased by 0.4% between quarter 3 and 4 of 2014, up from an increase of 0.2% between quarters 2 and 3. Within Professional, Scientific & Technical Activities the main contributions to the quarterly rate came from Accountancy and Legal Services, where prices rose by 1.4% and 1.3% between quarters 3 and 4 respectively. The increase in the prices received for UK Accountancy services was a result of an increase in the fees charged for audit and assurance services and tax consultancy. For Legal Services, it was an increase in fees for Business & Commercial Legal Advisory & Representation.

Comparison with average weekly earnings

The aggregate SPPI captures changes in the prices received by UK business for the provision of a selection of services to other UK businesses and the public sector. For many services, it is the cost of manpower that is the largest component of the price charged by businesses for providing the service, rather than the cost of goods or fuels. As a result, it is expected that the price charged for services should move in a similar way to the wages received by the UK workforce. Figure H shows a comparison of the annual percentage change of the fees received by UK businesses for the provision of services, as estimated by the aggregate SPPI, with an indicator of salaries received by the UK workforce who are employed in the service sector, as estimated by the Average Weekly Earnings (AWE) ‘Services’ pay index excluding bonuses.

As would be expected, the annual percentage change for AWE services follows a similar pattern to the SPPI. From 2001 to late 2008, both the AWE for services and the aggregate SPPI show similar trends, although AWE growth was significantly stronger. During the economic downturn in 2008/09 the rate of growth in both wages and service prices slowed dramatically. However while prices received for services started to fall in 2009, wages continued to grow compared with a year earlier, albeit at a much lower rate. Since quarter 4 of 2010 both AWE and the aggregate SPPI have shown lower growth that before the economic downturn and recently the gap between them has narrowed. In the last two years the AWE services and SPPI indices have both shown growth of around 1%.

Comparison with Consumer Prices Index

While the SPPI measures the amount received by a company for services they’ve provided to other businesses, the prices paid by households is estimated by the Consumer Prices Index (CPI). While the costs associated with providing services to both businesses and households will be broadly similar, there may be different costs associated with providing services to different customers. Figure H shows a comparison with the ‘All Services’ sector of the Consumer Prices Index (CPI) which measures the prices paid for services by households.

Generally inflation in the CPI ‘All Services’ index runs at a higher rate than the SPPI. Between late 2005 and 2008 the gap between the SPPI and CPI annual rate of inflation narrowed before widening again from 2009 to present. During the economic downturn in 2008/09 the annual rate of inflation for both indices decreased, with prices falling by as much as 1.6% for services sold by UK businesses while the prices paid by households continued to grow, although at a much lower rate, reaching a low of 2.8% in quarter 1 of 2010. Since quarter 4 of 2010 both indices have shown growth however the SPPI has shown significantly lower growth than CPI.

Other measures of service sector inflation

There are other measures of service sector inflation available such as the Chartered Institute of Procurement & Supply (CIPS) Purchasing Managers Index and the Confederation of British Industry (CBI) Service Sector Survey. There are significant methodological differences between these surveys and SPPI, therefore direct comparisons cannot be made.

All countries within the European Union are required to produce a measure of inflation for the service sector under the Short Term Statistics Regulation. Figure J shows the growth rates of service producer prices for a selection of EU countries since Q1 2010. The United Kingdom and Sweden recorded largely stable service producer price indices, growing by 2.4% and 0.9% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France and Spain, where SPPI inflation have been negative since 2011 Q2 in the case of Spain and Q1 2013 for France.

At the aggregate level, both a net and gross sector Services Producer Price Index is produced. The prices used to construct both of these indices are the same but different weights are used to construct the net sector index compared with the gross sector.

Summary of net sector movements

In quarter 4 of 2014, movements in the net sector aggregate SPPI were as follows:

• Annual inflation rose 0.6%, down from 1.3% in quarter 3 of 2014

• Between quarter 3 and 4 of 2014 quarterly inflation stood at 0.0%, compared with an increase of 0.1% between quarter 2 and 3 of 2014

Generally, the movements of the net sector aggregate SPPI are similar to those of the gross sector indices with the net sector aggregate tending to inflate at a slightly higher rate than the gross sector indices (Figure K).