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Rebasing the Producer Price Index and Services Producer Price Index (2010=100) This product is designated as National Statistics

Released: 11 May 2012 Download PDF (51.5 Kb)

Abstract

This report outlines plans to rebase the Producer Price Index, including trade prices (PPI) and the Services Producer Price Index (SPPI) onto 2010=100 at the end of 2013.

Summary

This article outlines plans to rebase the Producer Price Index (PPI) (including trade prices) and Services Producer Price Index (SPPI) at the end of 2013. 

Over time the relative volumes and prices of products and services bought and sold by UK manufacturers and businesses will change and new products and services will come onto the market.  PPI and SPPI are currently based on 2005=100, reflecting the weighting patterns of industry and purchases in 2005.  The Rebasing project will ensure that the index weighting system better reflects recent conditions by updating weighting patterns to reflect sales in 2010.  The reference year will change from 2005=100 to 2010=100.  The Rebasing project will consider the feasibility of implementing annually chainlinked indices to replace base weighted series some time in the future.

The newly rebased SPPI series will use the expanded 2010 Services Turnover Survey (STS) for calculating index weights.  The 2010 STS has undergone a series of methodological improvements and a report will be available on the ONS website on 25th May 2012.

The Rebasing project will introduce changes to the PPI index structure.  This results from changes to National Accounts Supply and Use tables which are structured in a SIC format rather than the Input/Output grouping format used during the SIC07 Reclassification project.  These changes will increase coherence between the PPI input structures and output structures.

The Rebasing Project will review the appropriate level of detail for calculation and publication of indices.  Given the sample size, some of the lower aggregate product group indices, known as 6-digit, are based on few items and susceptible to dying off over time.  Higher level price indices have a reduced risk of dying out and so may be more appropriate for variation of price clauses in contracts; a key use of PPIs and SPPIs.  ONS will consult on any proposed changes following our review.

Producer Price Index - Introduction

The PPI is a statutory surveys and comprises of four monthly series:

The Output Price Series1

These measure changes in the prices of goods produced by UK manufacturers and sold in the home market.

The Input Price Series1

These measure changes in the prices of materials and fuels bought by manufacturers for processing.  They are not limited to just those materials used in the final product, but also include what is required by the company in its day to day running.

The monthly Export Price Index (EPI)2

Measures the change in price of goods manufactured in the UK, destined for export markets.

The monthly Import Price Index (IPI)2

Measures change in the prices of goods and raw materials imported to the UK.  IPIs are a key component of the input price series.

Notes for Producer Price Index - Introduction

  1. The input and output PPI series are each produced on a gross and net sector basis:

    Gross Sector: All transactions are included when deriving the weights, including sales within the same sector.

    Net Sector: The weights used to calculate these exclude transactions between companies classified to the same sector.

  2. EPI and IPI are known collectively as trade price indices.

Services Producer Price Index - Introduction

The SPPI is a statutory survey.

The quarterly SPPI is a suite of individual price indices that provides information on price change for a range of service industries.  Each SPPI captures quarterly changes in the price received for services provided by UK businesses to other UK businesses and Government.

Weighting Methodology - Producer Price Index (PPI)

The PPI is a Laspeyres1 type index with fixed weights updated every five years using sales data taken from the the annual PRODucts of the European COMmunity (ProdCom) survey, which measures sales of products by manufacturers.  For further information about the ProdCom survey see Annual ProdCom Survey Quality and Methodology Information

Laspeyres price index

Laspeyres price index

The description for this equation is currently unavailable. ONS apologises for any inconvenience caused.

The PPI is based on a survey of approximately 4,000 manufacturers providing around 6,750 price quotations every month for a range of items manufactured within the UK.  The PPI sample is selected from the ProdCom sample using stratified (by sales value) simple random sampling.  The PPI sample is re-selected annually from the latest ProdCom sample.  The sample rotation enables new businesses and products to be picked up for the PPI as well as spreading the compliance burden over a wider number of businesses.

Weights for the Gross Sector Output (GSO) series are based on estimates of relative values of sales to the home market mainly derived from the ProdCom survey.  Weights for input indices are based on data on relative values of products purchased as inputs to the manufacturing process produced by Supply and Use tables in the Input/Output (I/O) framework.  In this case weights at the more detailed commodity level are calculated on a gross sector basis.

Net Sector weights are used to compile index numbers on a Net Sector basis, which means the index for a particular sector relates to transactions between that sector and other sectors only. Sales and purchases from within the same sectors are excluded.  Net Sector Output (NSO) series weights are based on the results of the Purchases and ProdCom survey and I/O.  The Net Sector Input series are constructed at the all-manufacturing level only and exclude all intra-sector transactions, that is, purchases from businesses classified to the same I/O group are excluded from the gross values before weights are calculated.  Input index weights are derived on the value of purchases that feed into the production process, both from the home and import markets.  This I/O information provides the weighting pattern to combine relevant PPI and import series. 

The Supply and Use table provided by National Accounts, which are part of the I/O framework, are structured in a SIC format rather than the I/O grouping format used for PPI Rebasing 2005=100.  Overall there has been a reduction in the number of groupings in the table from 123 to 114.  Greater concentration in the Service Sector in SIC07 is met with a substantial reduction in the number of groupings in the Manufacturing Sector.  At the previous rebasing, the Input series was based upon an I/O structure of 84 groupings within the Supply-Use data.  This has now reduced to 54, which reflects a substantial reduction in the complexity of the Input series in general.  It also removes the need to have two Input series structures to cater for SIC classifications and I/O groupings.  This change will need to be included as part of Rebasing since this is the only available structure of the source data used for weighting.  In order to meet National Accounts requirements, rebased data will be supplied at SUT level (114 industries).  This will naturally increase coherence between the PPI input structures and output structures.  For further information about the reclassification of Supply and Use tables see Reclassification of the UK supply and Use Tables.

Weighting Methodology - Export Price Index (EPI)

The EPI is a Laspeyres type index with fixed weights updated every five years using sales data provided by Her Majesty’s Revenue & Customs (HMRC).  The EPI is based on price quotations for a range of items manufactured in the UK but destined for the export market.  Some 1,800 manufacturers provide around 2,600 quotes monthly.  The EPI sample is selected using a cut-off design.  A geographical split is requested from suppliers when providing quotes i.e. one price for EU countries and one for Non-EU countries, and separate indices are produced and published for each category.

Weighting Methodology - Import Price Index (IPI)

The IPI is a Laspeyres type index with fixed weights updated every five years using sales data provided by HMRC and individual suppliers.  Prices of imported commodities and capital goods are collected from a sample of 2,500 import agents and manufacturers who return around 3,400 quotes each month. In addition some prices are collected from published sources.  The IPI sample is selected using a cut-off design.  Imported Capital Goods (ICGs) form part of the IPI index.  These are broken down by EU countries and non-EU countries.

Weighting Methodology - Service Producer Price Index (SPPI)

The SPPI is a Laspeyres type index with fixed weights updated every five years using turnover data from the Services Turnover Survey (STS).  The STS is a quinquennial survey of businesses which collects annual turnover broken down by service products.  The information supplied is used primarily to measure turnover for business-to-business services.  The SPPI is based on a survey of approximately 2,700 UK businesses providing around 6,000 price quotes every quarter for a range of services to other UK businesses and to local and central government.  The SPPI sample is selected from the STS using a cut-off design.  Like PPI, SPPI is produced on a Gross and Net Sector basis.

Use of the PPI and SPPI

There are a range of uses (186.9 Kb Pdf) of the PPIs and SPPIs.  The following are some of the key uses.

Within Government, they are used by:

  • ONS; for deflating current price values in the National Accounts;

  • The Treasury and Bank of England; for monitoring the general level of inflation in the economy and form an essential part of the monetary policy making process.

External uses include: 

  • formulating cost escalation clauses in long term contracts;

  • evaluating movements in input costs by businesses when comparing their own performance with national averages;

  • academic use.

Next steps

A specification for a rebasing system has been developed. This system will make the rebasing process less resource intensive, and more robust.  Development of the new system started at the beginning of April 2012 and will be rolled out in modules over a period of 6 months. 2010 sales data has undergone a series of quality assurance checks and will be loaded onto the rebasing system to calculate weights when the first module of the system is ready.

The Rebasing Project will investigate the appropriate level of detail for calculation and publication of indices, perhaps stopping the publication of some (or all) 6-digit indices, publishing them at a more aggregated level. ONS will consult on any proposed changes following our review.   

A parallel run of 6 months of PPI results and 2 quarters of SPPI results will be conducted to ensure continuity of processing and to compare rebased data (2010=100) with live data (2005=100), analysing trends in the process. This parallel run will form an assessment of the impact of rebasing. An article describing the results of this assessment will be published at the end of the project towards the end of 2013. Other articles will be published during the course of the project as part of its communication strategy to provide updates and plans for publication of the rebased series.

Background notes

  1. Quality and Methodology Information

    A Quality and Methodology Information (QMI) paper for both the PPI and SPPI describes in detail the intended uses of the statistics presented, their general quality and the methods used to produce them.

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