Services producer price inflation, UK: October to December 2015

The price of services sold by UK companies, as estimated by the aggregate Services Producer Price Index (SPPI), increased 0.6% in the year to quarter 4 of 2015, compared with an increase of 0.2% in the year to quarter 3 of 2015.

Between quarters 3 and 4 of 2015, the aggregate SPPI rose by 0.4%, compared with no movement between quarters 2 and 3 of 2015.

Real estate activities continued to show the largest rise in prices, with prices increasing by 3.7% in the year to quarter 4 of 2015.

Water supply, sewerage and waste management services showed the largest fall in prices, decreasing by 9.4% in the year to quarter 4 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 (quarters 3 and 4 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). 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 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 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 4 of 2015, prices increased by 0.6%.

Looking at the latest estimates (Table A) of the aggregate SPPI for quarter 4 of 2015, the main movements were:

• prices received by UK service providers increased 0.6% in the year to quarter 4 of 2015, up from an increase of 0.2% in quarter 3 of 2015

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

• service prices rose 0.4% between quarter 3 and 4 of 2015, compared with no movement between quarters 2 and 3 of 2015

• the main upward contribution to the quarterly rate of inflation came from professional, scientific and technical activities, and administrative and support services

• water supply, sewerage and waste management services showed the greatest decrease in the quarterly rate of inflation

The aggregate Services Producer Price Index (SPPI) rose by 0.6% in the year to quarter 4 of 2015, up from an increase of 0.2% in the year to quarter 3 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 1.2% in the year to quarter 4 of 2015 (up from an increase of 0.6% in the year to quarter 3 of 2015). Real estate activities, and transportation and storage also had notable contributions to the increase of the aggregate in the year to quarter 4 of 2015, increasing by 3.7% and 0.9%, respectively. These increases were partially offset by falls in the price of information and communication services, and water supply, sewerage and waste management services where prices fell by 0.8% and 9.4%, respectively in the year to quarter 4 of 2015 (Table B and Figure B).

Price increases for professional, scientific and technical activities, real estate, and transport and storage activities, provided the main contributions to the rise in the aggregate SPPI in the year to quarter 4 of 2015.

Professional, scientific and technical activities prices increased by 1.2% in the year to quarter 4 of 2015. Prices rose in all indices within this section, but the largest contribution to the rise was seen in accountancy. Accountancy prices increased by 2.1% in the year to quarter 4 of 2015, compared with an increase of 2.5% in the year to quarter 3 of 2015. This rise is mainly a result of an increase in the prices of tax consultancy.

Real estate activities prices increased 3.7% in the year to quarter 4 of 2015. This increase was mainly due to real estate agency prices which increased by 7.3% in the year to quarter 4 of 2015, from an increase of 7.6% in the year to quarter 3 of 2015. This increase was due to a rise in the prices for office lettings, rest of UK (excluding London).

Transport and storage activities increased 0.9% in the year to quarter 4 of 2015. Increases in sea and coastal water freight and business airfares have been the main contributions to the increase. Sea and coastal water freight prices increased by 8.2% in the year to quarter 4 of 2015, compared to an increase of 10.1% in the year to quarter 3 of 2015, as a result of increases in coastal, European and global freight prices. Business airfare prices increased by 2.9%, from an increase of 4.7% in the year to quarter 3 of 2015. There has been an increase in prices for all fare types.

The increases seen in professional, scientific and technical activities, transportation and storage, and real estate activities were partially offset by falls in the prices charged for information and communication services, and water supply, sewerage and waste management services. Prices fell 0.8% and 9.4%, respectively in the year to quarter 4 of 2015, compared with decreases of 0.6% and 7.8% in the year to quarter 3 of 2015.

The fall seen in the prices for information and communication services was as a result of the decrease in prices for telecommunications, where prices fell 6.4% in the year to quarter 4 of 2015.

The decrease in the prices for water supply, sewerage and waste management services was a result of the fall in prices for sorted recovered materials services, where prices fell 28.9% in the year to quarter 4 of 2015. Metal prices have shown a downward trend since 2011, which may be linked to a reduction in demand from China. 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 0.6% in the year to quarter 4 of 2015, compared with an increase of 0.2% in the year to quarter 3 of 2015. Figure D shows how the SPPI sections have contributed towards this 0.4 percentage point change. The main contribution to the change came from increasing prices for professional, scientific and technical, and administrative and support services.

Figure E : Services Producer Price Index by section

UK, Quarter 4 (Oct to Dec) 2011, Quarter 3 (July to Sept) 2015 and Quarter 4 (Oct to Dec) 2015

Source: Services Producer Price Index (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

.png (21.4 kB) .xls (22.5 kB)

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 4 of 2011 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.

SPPI prices for water supply, sewerage and waste management currently stands at a 5-year low, this is the continuation of a downward trend; the inflation rate has fallen from 4.7% in quarter 4 of 2011 to -9.4% in the most recent quarter.

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. Vehicle repair and maintenance has not experienced inflation lower than 1.7% at any point in the past 5 years, while administrative and support services, and information and communication have not experienced inflation higher than 1.4%.

Prices received for the services included in the aggregate Services Producer Price Index (SPPI) rose 0.4% between quarters 3 and 4 of 2015, compared with no movement between quarters 2 and 3 of 2015. Of the 10 sections that make up the aggregate SPPI, 8 sections showed increases in prices between quarters 3 and 4 of 2015.

The largest increases in the quarterly rate came from real estate activities, and administrative and support services, which increased by 1.3% and 1.1%, respectively between quarters 3 and 4 of 2015. 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 quarters 3 and 4 of 2015 with prices rising by 0.5%, compared with a decrease of 0.2% between quarters 2 and 3 of 2015. The main contributions to this increase were from advertising services, accountancy, and business and management consultancy prices, which increased by 1.3%, 1.0% and 0.7%, respectively, between quarters 3 and 4 of 2015. The movement in advertising services is driven by media planning and buying services. Figure G shows quarterly index movements in advertising services between quarter 3 2010 and quarter 4 2015.

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 of 2010, both AWE and the aggregate SPPI have shown lower growth than 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 4 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 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 I shows a comparison with the “all services” sector of the Consumer Price 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.

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 3 of 2010.

The United Kingdom and Sweden recorded largely stable service producer price indices, growing by 0.5% and 2.5% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France, where SPPI inflation has been negative since quarter 1 of 2013.

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 2010. Spain saw negative SPPI inflation from quarter 3 of 2011 and quarter 1 of 2015, however the last 2 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 4 of 2015, movements in the net sector aggregate SPPI were:

• annual inflation rose 0.7%, up from 0.3% in quarter 3 of 2015

• between quarters 3 and 4 of 2015, quarterly inflation stood at 0.4%, compared with no change between quarters 2 and 3 of 2015

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