Services producer price inflation, UK: April to June 2017

• The headline rate of inflation as estimated by the Services Producer Price Index (SPPI) slowed for the third consecutive period in Quarter 2 (Apr to June) 2017.

• The annual rate of growth for SPPI was 0.8% in Quarter 2 2017, which is down from 1.6% in Quarter 3 (July to Sept) 2016 and is the lowest annual growth since Quarter 4 (Oct to Dec) 2015.

• The quarterly rate of growth was 0.3% in Quarter 2, which is down from 0.4% in Quarter 1 (Jan to Mar).

• Transportation and storage services was the largest upward contributor to the annual rate, mainly as a result of rising prices for cargo handling services.

• The only downward contribution came from other personal services as a result of falling prices for commercial washing and dry cleaning services.

The Services Producer Price Indices (SPPI) provides a measure of inflation for the UK services 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 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 78% 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 service sector at industry level. The SPPI's coverage of the services sector at standard industrial classification (SIC) class, division and section level is available in the SPPI coverage document.

As resources allow, we will continue to review the existing indices and expand coverage through developing indices for new industries. As such, the SPPI will change composition from time to time but will always remain our best estimate of inflation in the UK services sector. The fact that coverage may change over time should be considered when deciding which indices best meet your needs.

Not all of the industry level indices used to construct the SPPI are National Statistics.

The figures presented in this statistical bulletin are considered provisional for the latest 2 quarters and may be revised as late data is received.

All figures presented in this statistical bulletin are calculated on a gross sector basis unless otherwise stated and all index numbers exclude VAT. None of the indices presented in this bulletin are seasonally adjusted.

Every 5 years, Services Producer Price Indices are rebased and their weights updated to reflect changes in industry.

The Services Producer Price Index (SPPI) has reported positive growth for most of the period across the past 10 years (Figure 1). During the economic downturn, SPPI annual growth fell from a rise of 3.7% in Quarter 2 (Apr to June) 2008 to a decline of 1.6% in Quarter 3 (July to Sept) 2009 before returning to more typical growth for the remainder of the period. For analysis of which SPPI industries have contributed to growth over the past 5 years please see section 5 of this release.

The Services Producer Price Index (SPPI) rose 0.8% on the year to Quarter 2 (Apr to June) 2017, down from an increase of 1.1% on the year to Quarter 1 (Jan to Mar) 2017 (Table 1). SPPI increased 0.3% between Quarter 1 and Quarter 2 2017. The annual rate of growth has been slowing since Quarter 3 (July to Sept) 2016 and is currently below the average growth of 1.4% for 2016. For analysis of what has driven the slowdown please see section 5 of this bulletin.

Of the 10 sections (as defined by the 2007 Standard Industrial Classification) that are combined to form SPPI, nine showed annual price increases and all 10 showed quarterly price increases (Figure 2).

Transportation and storage services, and information and communication services provided the largest and second-largest contributions to the annual growth rate respectively. Other personal services provided the only downward contribution to the annual rate.

Prices for transportation and storage services increased 2.1% on the year to Quarter 2 2017 (Table 2), the largest increase since Quarter 2 2011, and showed an upward contribution of 0.37 percentage points. A rise of 7.0% in the prices of cargo handling was the reason for increase, unchanged from the previous quarter and the second highest rate of growth since Quarter 3 (July to Sept) 2008 when the index peaked at 7.7%.

Prices for information and communication services had an annual growth rate of 0.5% (Table 2) and showed an upward contribution of 0.09 percentage points to the SPPI annual rate. The largest contribution to growth came from book publishing services, which increased 6.5% on the year.

The annual rate for other personal services decreased 4.9%, which is the second decrease in a row. Prior to 2017 the rate had not been negative since Quarter 4 (Oct to Dec) 2012. The main reason for the decrease is a fall in prices for commercial washing and dry cleaning services.

Transportation and storage services also provided the largest contribution to the quarterly rate with prices increasing 0.5%, which is down slightly from 0.6% in Quarter 1. Both quarters in the first half of 2017 have been higher than the average quarterly growth of 0.4% across 2016.

Prices for accommodation and food provided the second-largest contribution to the quarterly rate, increasing 1.1%. This increase comes after 2 quarters of negative growth. The main driver of the increase is a rise in prices charged by licensed hotels and motels with restaurants, which has seen an increase of 3.1%, the largest increase seen since Quarter 2 2015.

Figure 3 shows the annual rate of inflation for the services sector, as estimated by the Services Producer Price Index (SPPI), along with percentage point contributions to the rate by industry. SPPI is composed of 10 industries. The four industries with the largest index weights are reported separately, while water supply, sewerage and waste management; wholesale and retail trade, repair of motor vehicles; accommodation and food; real estate activities; education; and other personal services activities are grouped as “other”.

The annual rate of SPPI inflation has been positive across the past 5 years, with growth ranging from 0.3% in Quarter 3 (July to Sept) 2015 to 1.6% in Quarter 3 2016. The largest slowdown in annual growth over the period took place between Quarter 3 2014 to Quarter 3 2015 when annual inflation fell from 1.5% to 0.3% respectively. The slowdown was driven mainly by falling prices for information and communication services.

Prices for professional, scientific and technical services have typically provided the largest upward contribution to the annual rate across the past 5 years. Services within professional, scientific and technical activities include legal services; accountancy; business and management consultancy; advertising services; and engineering services. For the full list of services included within the industry please see Tables 3e and 3f within the SPPI dataset.

The most volatile industry across the period, in terms of contributions to the annual rate, has been information and communication services. This industry includes computer software; business telecoms; book publishing services; and sound recording and music publishing. Across the past 5 years the industry has returned 11 periods of upward contributions to the annual rate and 10 periods of downward contributions. Contributions across the period range from 0.61 percentage points in Quarter 2 (Apr to June) 2016 to a downward contribution of 0.22 percentage points in Quarter 1 (Jan to Mar) 2015.

Since Quarter 3 2016, the annual SPPI inflation rate has fallen from 1.6% to 0.8% in Quarter 2 2017. The main driver of the decline in the annual rate across this period came from professional, scientific and technical services. Contributions from this industry fell from 0.55 percentage points in Quarter 3 2016 to 0.05 percentage points in Quarter 2 2017. Another large change across this period came from transportation and storage services, which increased its contribution to the annual rate from 0.24 to 0.4 percentage points, making it the largest driver of overall SPPI inflation in the latest reporting period.

In addition to the data included within this statistical bulletin, the following detailed datasets are available:

Higher, lower and equal movements for each Services Producer Price Index are shown in the SPPI Records.

A summary of the revisions to SPPI data are available in the SPPI revision triangles.

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

The SPPI Quality and Methodology information document contains important information on:

• the strengths and limitations of the data and how it compares with related data

• users and uses 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, an SPPI standard errors article was published on 28 July 2016. The article presented the calculated standard errors of the Services Producer Price Index (PPI) during the period Quarter 2 (Apr to June) 2012 to Quarter 1 (Jan to Mar) 2016, for both quarter-on-quarter and 12-month growth.

Guidance on using indices in indexation clauses (2015) has been published. It covers producer prices, services producer prices and consumer prices.

Detailed information on the methods used to compile the SPPI is available in the SPPI manual.