Services producer price inflation, UK: January to March 2016

The price of services sold by UK companies, as estimated by the aggregate Services Producer Price Index (SPPI), increased 1.4% in the year to Quarter 1 of 2016, compared with an increase of 0.7% in the year to Quarter 4 of 2015.

Between Quarter 4 2015 and Quarter 1 2016, the aggregate SPPI rose by 0.6%, compared with an increase of 0.5% between Quarters 3 and 4 of 2015.

Real estate activities continued to show the largest rise in prices, with prices increasing by 3.8% in the year to Quarter 1 of 2016.

Water supply, sewerage and waste management services showed the largest fall in prices, decreasing by 6.0% in the year to Quarter 1 of 2016.

The Services Producer Price Inflation (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 inflation data.

The figures presented in this statistical bulletin are considered provisional for the latest 2 quarters (Quarter 4 2015 and Quarter 1 2016) 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). We do 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. 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 when deciding which indices best meet your needs.

Between early-2006 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 2.4% in Quarter 1 of 2006 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 1 of 2016, prices increased by 1.4%.

Looking at the latest estimates (Table A) of the aggregate SPPI for Quarter 1 of 2016, the main movements were:

• prices received by UK service providers increased 1.4% in the year to Quarter 1 of 2016, up from an increase of 0.7% in Quarter 4 of 2015
• the main upward contributions to the annual rate came from increases in the prices charged for professional, scientific and technical activities, information and communication, and real estate activities
• service prices rose 0.6% between Quarter 4 2015 and Quarter 1 of 2016, compared with an increase of 0.5% between Quarters 3 and 4 of 2015
• the main upward contribution to the quarterly rate of inflation came from professional, scientific and technical activities, and information and communication

The aggregate Services Producer Price Index (SPPI) rose by 1.4% in the year to Quarter 1 of 2016, up from an increase of 0.7% in the year to Quarter 4 of 2015. Of the 10 sections (as defined by the 2007 Standard Industrial Classification) that are combined to form the aggregate SPPI, 8 showed price increases.

The main upward contributions to the annual rate of the aggregate SPPI came from professional, scientific and technical activities, which increased 1.8% in the year to Quarter 1 of 2016, up from an increase of 1.3% in the year to Quarter 4 of 2015. Information and communication, and real estate activities also had notable contributions to the increase of the aggregate in the year to Quarter 1 of 2016, increasing by 2.5% and 3.8%, respectively. The only section to show a decrease was water supply, sewerage and waste management services where prices fell by 6.0% in the year to Quarter 1 of 2016, compared with a decrease of 9.4% in the year to Quarter 4 of 2015 (Table B and Figure B).

Price increases for professional, scientific and technical activities, information and communication, and real estate activities, provided the main contributions to the rise in the aggregate SPPI in the year to Quarter 1 of 2016.

Professional, scientific and technical activities prices increased by 1.8% in the year to Quarter 1 of 2016. Prices rose in all indices within this section, but the largest contribution to the rise was seen in business management and consultancy. Business management and consultancy prices increased by 3.1% in the year to Quarter 1 of 2016, compared with an increase of 0.7% in the year to Quarter 4 of 2015. This rise is mainly a result of companies increasing their charges for providing management consultancy services.

Information and communication prices increased 2.5% in the year to Quarter 1 of 2016. This increase was mainly due to computer software prices which increased by 2.5% in the year to Quarter 1 of 2016, from an increase of 0.5% in the year to Quarter 4 of 2015. This increase was due to a rise in the prices for maintenance and support of software systems and applications.

Real estate activities continued to show increases in the year to Quarter 1 of 2016 with prices rising by 3.8%. Increases in real estate agency prices have been the main contribution to the increase. Real estate agency prices increased 7.3% in the year to Quarter 1 of 2016, compared with an increase of 7.1% in the year to Quarter 4 of 2015. There have been increases in the prices of real estate activities throughout the UK.

Water supply, sewerage and waste management services was the only section within the aggregate SPPI to experience a decrease. Prices fell 6.0% in the year to Quarter 1 of 2016, compared with a fall of 9.4% in the year to Quarter 4 of 2015. This decrease was largely as a result of the fall in prices for sorted recovered materials services, where prices fell 28.1% in the year to Quarter 1 of 2016. Metal prices have shown a downward trend since 2011 with many metal market prices ending 2015 at low levels. This may be linked to a reduction in growth in the Chinese economy. This reduced demand may have contributed to the fall in the price of metals, including the scrap metals that are processed by contributors to SPPI (Figure C).

The aggregate SPPI increased 1.4% in the year to Quarter 1 of 2016, compared with an increase of 0.7% in the year to Quarter 4 of 2015. Figure D shows how the SPPI sections have contributed towards this 0.7 percentage point change. The main contribution to the change came from increasing prices for information and communication, and professional, scientific and technical services.

Figure E: Services Producer Price Index by section

Quarter 1 (Jan to Mar) 2012 to Quarter 1 (Jan to Mar) 2016, UK

Source: Services Producer Price Indices (SPPI) - 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).

Download this image Figure E: Services Producer Price Index by section

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Examining inflation for each of the sections that contribute to 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 Quarter 1 of 2012 and the annual rates of inflation for the 2 most recent quarters. The 10 sections were split evenly between those which saw an increase in inflation relative to the last quarter and those which experienced a fall. There was a rise in the aggregate inflation rate over this period.

One notable difference between each section is the range of inflation rates that have been experienced since 2012. Education, accommodation and food, real estate activities, 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. Vehicle repair and maintenance has not experienced inflation lower than 1.6% at any point in the past 5 years, while administrative and support services have not experienced inflation higher than 1.4%.

Prices received for the services included in the aggregate Services Producer Price Index (SPPI) rose 0.6% between Quarter 4 of 2015 and Quarter 1 of 2016, compared with an increase of 0.5% between Quarters 3 and 4 of 2015. Of the 10 sections that make up the aggregate SPPI, 6 sections showed increases in prices between Quarter 4 of 2015 and Quarter 1 of 2016.

The largest increases in the quarterly rate came from information and communication, and professional, scientific and technical activities, which increased by 1.4% and 1.1%, respectively between Quarter 4 of 2015 and Quarter 1 of 2016. The remaining increases were small, ranging from 0.1% to 0.7% (Table C and Figure F).

Professional, scientific and technical activities showed the largest contribution to the SPPI aggregate rate between Quarter 4 of 2015 and Quarter 1 of 2016 with prices rising by 1.1%, compared with an increase of 0.6% between Quarters 3 and 4 of 2015. The main contributions to this increase were from business and management consultancy, and accountancy prices, which increased by 2.8% and 2.2%, respectively, between Quarter 4 of 2015 and Quarter 1 of 2016. The movement in business and management consultancy was driven by marketing management consultancy and strategic management consultancy services. The increase in accountancy prices was driven by audit and assurance services.

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 labour 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, a change in the wage structure of the workforce can have an important impact on the SPPI. It is expected that the price charged for services should move in a similar way to the wages received by the UK workforce. Figure G shows 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.

Figure G shows the growth rates of both wages and services prices slowed considerably during 2008 and 2009, with services inflation falling from an average of 3.5% in 2008 to -0.8% in 2009, while growth in services wages slowed from 3.9% to 1.8% on average during the same period. Following the downturn, services prices and wages have followed similar trends, diverging slightly during 2015, as wages grew faster than services prices from the end of 2014. Looking at the most recent data, earnings have continued to grow faster than services producer prices, with services wages growing by 1.8% in Quarter 1 2016, compared to services prices, which had grown by 1.4% over the same period.

Although labour costs and therefore wage growth, is a significant factor determining services output prices, competitive pressures will have some bearing on the extent to which labour costs can be passed through to service delivery prices. As wage growth has picked up during 2014 and 2015, on-going competitive pressures in the services market may have limited the extent to which businesses can pass on those increasing labour costs.

The rise in service sector wage growth reflects some wider tightening in the UK labour market. Following strong employment growth over the past 2 years, the unemployment rate among those aged 16 and above remained at 5.1% in the 3 months to March 2016, broadly at its pre-downturn average (2000 to 2007). The employment rate rose further to 74.2% in the 3 months to March 2016 for those aged between 16 and 64, which is the highest rate since comparable records began.

In parallel with the fall in the unemployment rate, labour demand as measured by the number of vacancies has been relatively strong. The number of unemployed people per vacancy has fallen quite considerably since 2011, from 5.8 in the 3 months to December 2011 to 2.2 in the 3 months to March 2016, indicating that there are fewer unemployed workers for each vacancy. In relation to the services industry, the number of vacancies has been rising since mid-2012 and increased by 3.0% in the 3 months to March 2016 compared with a year earlier.

While the tightening labour market may be exerting upward pressure on wages, the productivity of labour also influences wage growth. Improvements in productivity creates capacity for output to rise faster than the corresponding rise in inputs, thereby allowing firms to produce more output per unit of labour employed. Productivity growth allows for output prices to rise more gradually, all else being equal. Unit labour costs – which measures the average cost of labour per unit of output – increased by 0.4% in Quarter 4 2015 (October to December), compared with a 0.5% increase in the previous quarter. This would indicate that labour costs continue to exert upward pressure on services prices.

While there are a number of factors affecting services prices, the demand for goods and services in the UK economy could also have an impact on services prices. The latest estimate has shown GDP increasing by 0.4% in Quarter 1 2016, compared with 0.6% in the previous quarter. Much of this growth has been concentrated in the services industry, with output increasing by 0.6%, albeit much more slowly compared with the previous quarter.

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 Price 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 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 2.3% in Quarter 4 of 2009. 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.

International comparison

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 4 of 2010.

The UK and Sweden recorded largely stable service producer price indices, growing by 0.1% and 1.1% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France and Spain, where SPPI inflation had been negative until Quarter 4 of 2015 and Quarter 1 of 2015 respectively.

In recent quarters the range of inflation rates experienced by Spain, France, Austria, Sweden and the UK 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, with Austria’s inflation rate in Quarter 3 of 2015 at the lowest level seen since 2010. Spain saw negative SPPI inflation from Quarter 3 of 2011 and Quarter 1 of 2015, however, the last 3 quarters have seen positive SPPI inflation, with the Spanish inflation rate at the highest since 2011.

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 1 of 2016, movements in the net sector aggregate SPPI were:

• annual inflation rose 1.3%, up from 0.7% in Quarter 4 of 2015
• between Quarter 4 of 2015 and Quarter 1 of 2016, quarterly inflation stood at 0.7%, compared with 0.4% between Quarters 3 and 4 of 2015

Generally, the movements of the net sector aggregate SPPI are similar to those of the gross sector indices (Figure J).