1. Main points

  • The annual rate of inflation for goods leaving the factory gate increased for the first time in 6 months in August 2017.
  • Factory gate prices (output prices) rose 3.4% on the year to August 2017, up from 3.2% in July 2017, with the change in the rate being driven mainly by petroleum products.
  • Prices for materials and fuels (input prices) rose 7.6% on the year to August 2017, up from 6.2% in July 2017, with the change in the rate being driven mainly by crude oil.
  • Recent rises to input costs may have now passed through industries that represent core inflation, although energy and food prices have grown in recent months.
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2. Things you need to know about this release

The factory gate price (output price) is the amount received by UK producers for the goods that they sell to the domestic market. It includes the margin that businesses make on goods, in addition to costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent.

The input price measures the price of materials and fuels bought by UK manufacturers for processing. It includes materials and fuels that are both imported or sourced within the domestic market. It is also not limited to materials used in the final product, but includes what is required by businesses in their normal day-to-day running, such as fuels.

Index numbers shown in the main text of this bulletin are on a net sector basis. The index for any industry relates only to transactions between that industry and other industries; sales and purchases within industries are excluded.

Indices relate to average prices for a month. The full effect of a price change occurring part way through any month will only be reflected in the following month’s index.

All index numbers exclude VAT. Excise duty (on cigarettes, manufactured tobacco, alcoholic liquor and petroleum products) is included, except where labelled otherwise.

Each Producer Price Index (PPI) has two unique identifiers: a 10-digit index number, which relates to the Standard Industrial Classification code appropriate to the index and a 4-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

Every 5 years, producer price indices are rebased and weights updated to reflect industry changes.

Figures for the latest 2 months are provisional and the latest 5 months are subject to revisions in light of (a) late and revised respondent data and (b) for the seasonally adjusted series, revisions to seasonal adjustment factors are re-estimated every month. A routine seasonal adjustment review is normally conducted in the autumn each year.

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3. Producer price inflation summary

Figure 1 shows input and output Producer Price Indices (PPI) across the past 15 years. Looking at the trend across the period it can be seen that the two indices behave differently. Input PPI is mostly driven by commodity prices, which tend to be more volatile over time compared with prices for finished goods. Input PPI is also sensitive to exchange rate movements as roughly two-thirds of inputs into the UK manufacturing sector are imported, which is reflected in the weight of imported materials and fuels in the index.

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4. The annual rate of inflation for materials and fuels increased for the first time in 7 months in August

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose by 1.4 percentage points to 7.6% in August 2017. While this is the first time the rate has increased in 7 months, it remains 12.3 percentage points below its recent peak of 19.9% in January 2017.

The 1-month rate for materials and fuels rose 1.6% in August 2017, which is the first time the rate has shown positive growth in 7 months. Between March and July 2017, the 1-month rate experienced consecutive 5 months of negative growth, which is the longest period of no growth since January 2015 when prices had not grown for eight consecutive periods.

At 107.4 the input PPI index suggests input prices overall were at roughly the same level in August 2017 as they were back in March 2017 when the index stood at 107.5, but still below the historic peak of 120.9 in March 2013.

Since October 2016, the sterling effective annual rate has appreciated from a decline of 18.4% to a decline of 3.6% in August 2017 (Table 2), although this is mainly a result of movements falling out of the annual comparison; at 75.6 in August 2017, the index is not far from its recent historic low of 74.7 in October 2016. All else equal, a weak exchange rate will lead to higher prices for imported goods over time.

The annual rate of inflation for imported materials and fuels was 7.5% in August 2017 (Table 2). Imported materials and fuels represent roughly two-thirds of overall materials and fuels in terms of index weight.

Inflation from imported materials and fuels grew at a faster rate than the overall materials and fuels index across the whole of 2016 as the value of sterling depreciated against other leading currencies. In the first 8 months of 2017, however, the imported component of the index has grown at a faster rate on only three occasions.

Figure 2 shows contributions by industry to the monthly and annual rate of price inflation for materials and fuels purchased by manufacturers (input prices). The largest upward contribution to the annual rate in August 2017 came from crude oil, which contributed 1.90 percentage points on the back of annual price growth of 13.8% (Table 3). This is the first increase to the annual rate for crude oil since February 2017. The upward contribution from crude oil was driven by an annual increase of 13.3% in prices of imported crude petroleum and natural gas.

Home food materials and imported metals provided the second and third largest contributions to the annual rate, with 1.46 and 1.36 percentage points respectively. Prices for home food materials rose 10.5% on the year, while prices for imported metals rose 18.1% (Table 3).

Crude oil also provided the largest upward contribution to the monthly rate with 0.88 percentage points (Figure 2), which was driven by price growth of 6.2% between July and August 2017 (Table 3).

The change to the annual rate for fuels and materials purchased by manufacturers (input prices) was 1.4 percentage points in August 2017 (Table 1), which followed 6 months of negative changes.

Figure 3 shows percentage point contributions to the 1.4 percentage points change in the annual rate of inflation. Crude oil provided the largest upward contribution to the change at 0.86 percentage points. The second and third largest upward contributions came from imported metals and fuel at 0.25 and 0.22 percentage points respectively. Home food materials was the only industry to show a downward contribution to the change.

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5. The annual rate of inflation for goods leaving the factory gate increased for the first time in 6 months in August

The annual rate of inflation for goods leaving the factory gate (output prices) grew by 0.2 percentage points to 3.4% in August 2017 following 2 months of slowing growth in the rate (Table 4). The rate is still above an average 2.8% growth across the previous 12 months, but 0.3 percentage points below the recent peak of 3.7% in February and March 2017.

The 1-month rate was 0.4% in August 2017 following 0.1% growth between June and July 2017. The rate has showed positive growth for all but 1 month over the past 12 months; in June the rate was flat. Recent slowing growth in the annual rate is therefore due to movements falling out of the annual comparison.

Figure 4 shows contributions by industry to the monthly and annual rate of factory gate price inflation (output prices). Most industries showed upward contributions to the annual and monthly rate; tobacco and alcohol was flat on the month.

Food products provided the largest upward contribution to the annual rate with 0.89 percentage points. This was driven by price growth of 5.9% on the year to August 2017 (Table 5). Growth has mainly been driven by increasing prices for dairy products, which rose 19.3% on the year. For further analyses on food prices please refer to section 6 of the May release and section 4 of the January release.

Petroleum products and computer, electrical and optical products showed the second and third largest upward contributions to the annual rate, with 0.47 and 0.38 percentage points respectively. Petroleum prices increased 6.9% on the year, while prices for computer, electrical and optical products grew by 3.2%.

Petroleum products provided the largest upward contribution to the monthly rate at 0.20 percentage points. Rising prices for petroleum products was a leading driver of annual inflation in the second half of 2016 and early 2017, although growth has slowed in recent months. Annual price growth for petroleum products fell from a peak of 23.6% in February 2017 to 3.8% in July 2017 before increasing to 6.9% in the latest month. Month-on-month growth has been negative across four of the last six periods. An increase in the price for inputs of crude oil is the main factor as crude is the main input used in the manufacture of petroleum products.

The change to the annual rate for goods leaving the factory gate (output prices) was 0.2 percentage points in August 2017 (Table 4), which followed two months of falls.

Figure 5 shows contributions to change in the annual rate. The 0.2 percentage points change in August 2017 was driven mainly by petroleum products, which contributed 0.26 percentage points; however, the positive contribution was offset by negative contributions from food products; computer, electrical and optical; tobacco and alcohol; and metal, machinery and equipment.

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6. Recent rises to input costs may have now passed through industries that represent core inflation, although energy and food prices have grown in recent months

Figure 6 shows the annual rate of inflation for the headline output Producer Price Index (PPI), core output PPI that excludes food, beverages, tobacco and petroleum (FBTP) industries and FBTP output PPI that includes FBTP industries. FBTP industries tend to experience more volatile transitory inflation with growth being prone to temporary shocks that can mask the underlying inflation trend. Looking at core inflation can therefore help to determine the underlying long-running inflation trend.

While there is no widely agreed definition of core inflation, our coverage for PPI includes the following industries: clothing, textiles and leather; paper and printing; chemicals and pharmaceuticals; metals, machinery and equipment; computers, electrical and optical; transport equipment; and other manufactured products; these industries have a 69% weight in headline PPI, with FBTP industries making up the remaining 31%.

For most of the past 5 years the core inflation rate has remained between zero and 1.0%. From January 2016, however, the rate moved upwards and has remained above 2.0% since November 2016. As discussed in section 6 of June’s PPI release the main factors for the recent rise in core inflation are increases to inputs of global commodity and energy prices and a depreciation of sterling against other leading currencies. These factors led to rising input costs, which has in turn resulted in manufacturers passing on some of these increased costs to their customers by raising output prices. For commentary on energy prices please see section 4 of July’s Prices Economic Commentary.

Between April and June 2017, however, growth in the core rate of inflation slowed. Between April and June 2017, the rate rose by just 0.1 percentage points to 2.9% and has since fallen back to 2.5% in August 2017. This might indicate that the upward pressure on output prices driven by the rise in input costs across 2016 has now passed through industries that represent core inflation and onto the wider economy; however, further periods of data will be needed to see if this is the start of a trend.

While upward pressure on core inflation associated with the recent rise in input costs might have eased, this does not mean pressure on headline inflation has also eased. The inflation rate for FBTP industries fell from 6.7% in March 2017 to 4.6% in June 2017, although since then the rate has levelled off and increased to 5.1% in August 2017. According to the World Bank the global average price for overall crude oil rose from US $46.2 per barrel in June 2017 to $49.9 in August 2017. This price rise is due likely to efforts by OPEC to rebalance supply and demand via production cuts that its members have agreed. New upward pressures might also emerge due to recent weather events in the US that have led to multiple oil refinery closures, including Motiva plant in Port Arthur, the largest refinery in the country.

Figure 7 shows the annual rate of inflation for headline PPI along with contributions to the annual rate. Inflation from FBTP industries provided the largest contribution to the headline rate of inflation for 43 out of the 61 months since August 2012 (Figure 7), including the period between late 2014 to early 2016, when it was the main driver of deflation for headline PPI.

Changes to FBTP inflation over the past 5 years have been driven mainly by changes in food and petroleum prices. The recent rise in headline inflation between September 2016 and March 2017 was driven mainly by rising prices for food and petroleum products. Between March and July 2017, contributions from petroleum products fell, although in August they increased.

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8. Quality and methodology

The PPI Quality and Methodology Information document contains important information on:

  • the strengths and limitations of the data and how it compares with related data
  • uses and users 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, a PPI standard errors article was published on 20 March 2017. The article presented the calculated standard errors of the Producer Price Index (PPI) during the period January 2016 to December 2016, for both month-on-month and 12-month growth.

Guidance on using indices in indexation clauses covers producer prices, services producer prices and consumer prices.

An up-to-date manual for the PPI, including the import and export index, is now available. PPI methods and guidance provides an outline of the methods used to produce the PPI as well as information about recent PPI developments.

Gross sector basis figures, which include intra-industry sales and purchases, are shown in PPI dataset Tables 4 and 6.

The detailed input indices of prices of materials and fuels purchased by industry (PPI dataset Table 6) do not include the Climate Change Levy (CCL). This is because each industry can, in practice, pay its own rate for the various forms of energy, depending on the various negotiated discounts and exemptions that apply.

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