Services producer price inflation, UK: April to June 2015

• The price of services sold by UK companies, as estimated by the aggregate Services Producer Price Index (SPPI), increased 0.5% in the year to quarter 2 of 2015, compared with an increase of 0.6% in the year to quarter 1 of 2015

• Between quarter 1 and 2 of 2015, the aggregate SPPI rose by 0.3%, compared with an increase of 0.2% between quarter 4 of 2014 and quarter 1 of 2015

• Professional, scientific and technical activities, and real estate activities provided the greatest upward contributions to the annual rate of inflation. This was partially offset by a fall in prices for water supply, sewerage and waste management services

• Real estate activities showed the largest rise in prices, with prices increasing by 3.3% in the year to quarter 2 of 2015

• Water supply, sewerage and waste management services continued to show the largest fall in prices, decreasing by 6.7% in the year to quarter 2 of 2015

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 2 quarters (quarter 1 and quarter 2 of 2015) 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, we estimate 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 Standard Industrial Classification (SIC) class, division and section level is available in the SPPI coverage document (113 Kb Excel sheet). As resources allow, we 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 our 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, which resulted in the development of 8 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 quarter 4 2013 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 SPPI quarter 4 2013 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 Services Producer Price Index (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 2 of 2015, prices increased by 0.5%.

Looking at the latest estimates (Table A) of the aggregate SPPI for quarter 2 of 2015, the main movements were:

• prices received by UK service providers increased 0.5% in the year to quarter 2 of 2015, down slightly from an increase of 0.6% in quarter 1 of 2015

• the main upward contributions to the annual rate came from increases in the prices charged for professional, scientific and technical activities, and real estate activities, however, these were partially offset by falls in the price of water supply, sewerage and waste management services

• service prices rose 0.3% between quarter 1 and 2 of 2015, compared with an increase of 0.2% between quarter 4 of 2014 and quarter 1 of 2015

• the main upward contribution to the quarterly rate of inflation came from accommodation and food

• water supply, sewerage and waste management services showed the greatest decrease in prices falling by 6.7% in the year to quarter 2 of 2015 compared with a decrease of 6.2% in the year to quarter 1 of 2015

The aggregate Services Producer Price Index (SPPI) rose by 0.5% in the year to quarter 2 (Apr to June) of 2015, down slightly from an increase of 0.6% in the year to quarter 1 (Jan to Mar) of 2015. Of the 10 sections (as defined by the 2007 Standard Industrial Classification) that are combined to form the aggregate SPPI, 6 showed price increases.

The main upward contributions to the annual rate of the aggregate SPPI came from professional, scientific and technical activities, which increased 0.9% in the year to quarter 2 of 2015 (up from an increase of 0.8% in the year to quarter 1 of 2015) and real estate activities, which increased by 3.3% in the year to quarter 2 of 2015 (down from a rise of 3.5% in the year to quarter 1). Increases in transportation and storage, and information and communication have also had a notable effect on the aggregate in the year to quarter 2 of 2015, increasing by 0.7% and 0.5%, respectively. These increases were partially offset by a fall in the price of water supply, sewerage and waste management services, where prices fell by 6.7% in the year to quarter 2 of 2015 (up from a decrease of 6.2% in the year to quarter 1 2015) (Table B and Figure B).

Increases in price for professional, scientific and technical activities, and real estate activities, provided the main contributions to the rise in the aggregate SPPI in the year to quarter 2 of 2015.

Professional, scientific and technical activities prices increased by 0.9% in the year to quarter 2 of 2015. This was mainly caused by a rise in the prices in legal and accounting services. Accountancy services prices increased by 3.3% in the year to quarter 2 of 2015, compared with an increase of 4.0% in the year to quarter 1 of 2015. This rise is mainly a result of increases in auditing and assurance activities where prices have risen by 4.3% in the year to quarter 2 of 2015, up slightly from a rise of 4.2% in the year to quarter 1 of 2015. This rise in the accountancy index was driven by continued demand for these services from the first quarter of the year, with contributors indicating that quarter 2 continues to be a busy time of the year.

Real estate activities also made a notable upward contribution to the annual rate of inflation as measured by the aggregate SPPI. Prices increased by 3.3% in the year to quarter 2 of 2015, down from an increase of 3.5% in the year to quarter 1 of 2015. This was caused mainly by an increase in the price of estate agencies, where prices increased by 8.3% in the year to quarter 2 of 2015, down from an increase of 8.4% in the year to quarter 1 of 2015. There were increases in the price of all estate agency activities, however the largest contribution was in prices for office real estate outside of London.

Figure C shows how the SPPI estate agents’ index was affected by the economic downturn between 2008 and 2010. The index fell sharply in 2008 as the value of the commercial properties sold fell, affecting the percentage fees that estate agents received, and the number of transactions reduced, forcing estate agents to ask for lower fees for their services due to greater competition. Prices began to rise in the second quarter of 2010, as property values began to stabilise. The index remained close to 0% growth between 2011 and the end of 2013. Since 2014, significant rises have been seen in the index, as property values and the number of transactions taking place has increased.

Further analysis of this can be found in the latest SPPI short story.

The increases seen in professional, scientific and technical activities, and real estate activities were partially offset by a fall in the prices charged for water supply, sewerage and waste management services, where prices fell 6.7% in the year to quarter 2 of 2015, compared to a decrease of 6.2% in the year to quarter 1 of 2015. This is mainly a result of the decrease in prices for sorted recovered materials services and waste disposal, where prices fell 14.2% and 4.5% respectively, in the year to quarter 2 of 2015. The fall in prices of sorted materials recovery services was driven by a drop in the prices received for constructional scrap due to less export demand; whereas the fall in prices of waste disposal was driven by a drop in the prices of industrial waste.

Slightly smaller contributions to the growth in the aggregate SPPI came from transportation and storage, and information and communication, with prices increasing by 0.7% and 0.5% respectively in the year to quarter 2 of 2015. The increase in transportation and storage was as a result of an increase in business air fares, which rose by 4.6% in the year to quarter 2 of 2015, down from an increase of 5.4% in the year to quarter 1 of 2015, as a result of increases in prices for all fare types.

The increase in information and communication prices was as a result of an increase in book publishing services, which rose by 2.8%, down slightly from an increase of 3.0% in the year to quarter 1 of 2015. This was a result of an increase in the price for printed general interest journals and periodicals due to a rise in production costs.

The aggregate SPPI increased 0.5% in the year to quarter 2 of 2015, compared with an increase of 0.6% in the year to quarter 1 of 2015. Figure D shows how the SPPI sections have contributed towards this 0.1% change. There were increases in information and communication, and professional, scientific and technical activities; however these were offset by a significant decrease in the accommodation and food section.

Figure E : Services Producer Price Index by Section

Quarter 2 (Apr to Jun) 2011 to Quarter 2 (Apr to Jun) 2015, United Kingdom

Source: Office for National Statistics

Notes:

1. Q1 refers to Quarter 1 (January to March), Q2 refers to Quarter 2 (April to June), Q3 refers to Quarter 3 (July to September) and Q4 refers to Quarter 4 (October to December)

One notable difference between each section is the range of inflation rates that have been experienced since 2010. Education, accommodation and food, and water supply, sewerage, and 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 and repair of motor vehicles and motorcycles has not experienced inflation lower than 1.7% at any point in the past 4 years, while other services, administrative and support services, and information and communication have not experienced inflation higher than 1.5%.

Prices received for the services included in the aggregate Services Producer Price Index (SPPI) rose 0.3% between quarters 1 (Jan to Mar) and 2 (Apr to June) of 2015, compared to an increase of 0.2% between quarter 4 (Oct to Dec) of 2014 and quarter 1 of 2015. Of the 10 sections that make up the aggregate SPPI, 9 sections showed increases in prices between quarters 1 and 2 of 2015. The majority of these increases were small however, ranging from 0.1% to 0.6%.

The main contribution to the increase in the quarterly rate came from accommodation and food, which increased by 1.4% between quarter 1 and 2 of 2015 (Table C and Figure F).

Accommodation and food prices rose 1.4% between quarter 1 and 2 of 2015, compared with a decrease of 0.4% between quarter 4 of 2014 and quarter 1 of 2015. The main contribution to the change in the current quarterly rate came from hotel prices, which increased by 2.5%. This is compared with a fall of 1.7% between quarter 4 of 2014 and quarter 1 of 2015. This rise in hotel prices was driven by increased demand for conferencing services in London and quarter 2 being a busy period (Figure G).

Comparison with Average Weekly Earnings

The aggregate Services Producer Price Index (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, the cost of manpower 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 to 2009, 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 (Oct to Dec) of 2010, both AWE and the aggregate SPPI have shown lower growth that before the economic downturn. In the last 2 years, the AWE services and SPPI indices have both shown growth of around 1%. However, in the last 3 quarters, the AWE services index has shown stronger growth than SPPI. The rises in the AWE services index have been driven by a large increase in the retail and repair sector, which is not measured in the SPPI.

Comparison with Consumer Price 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 I 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 to 2009, 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 and 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 producer price inflation for the services sector under the Short Term Statistics Regulation. Figure J shows the growth rates of service producer prices for a selection of EU countries since quarter 1 (Jan to Mar) of 2010. The United Kingdom and Sweden recorded largely stable service producer price indices, growing by 2.8% and 2.3% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France and Spain, where SPPI inflation has been negative since quarter 3 (July to Sep) of 2011 in the case of Spain and quarter 1 (Jan to Mar) of 2013 for France.

However, in recent quarters the range of inflation rates experienced by these countries has narrowed, as the countries with the lowest inflation rates (France and Spain) saw an increase, and the country with the highest rate (Austria) saw a decrease in inflation. Austria’s inflation rate was the lowest since 2011 in the latest available data, and Spain’s was the highest.

At the aggregate level, both a net and gross sector Services Producer Price Index (SPPI) 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 2 (Apr to June) of 2015, movements in the net sector aggregate SPPI were:

• annual inflation rose 0.5%, down from 0.7% in quarter 1 (Jan to Mar) of 2015

• between quarter 1 and quarter 2 of 2015, quarterly inflation stood at 0.2%, unchanged from the previous quarter

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).