Producer price inflation, UK: August 2018

Changes in the prices of goods bought and sold by UK manufacturers including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices).

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This is an accredited national statistic.

Contact:
Email Martina Portanti

Release date:
19 September 2018

Next release:
17 October 2018

1. Main points

  • The headline rate of output inflation for goods leaving the factory gate was 2.9% on the year to August 2018, down from 3.1% in July 2018.

  • The growth rate of prices for materials and fuels for manufacturing (input prices) slowed to 8.7% on the year to August 2018, down from 10.3% in July 2018.

  • All product groups provided upward contributions to output annual inflation; the largest contribution for the fourth consecutive month was made by petroleum products.

  • Annual inflation remained positive for both input and output indices for the 26th consecutive month.

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2. Things you need to know about this release

Following last month’s announcement, we have decided to suspend the launch of the consultation on possible changes to published Producer Price Indices while further information on user requirements is collected. Please email ppi@ons.gov.uk with your contact details if you want to be informed about future user events.

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.

The use of core input inflation removes the more volatile indices of food, tobacco, beverages and petrol from our price values.

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 Value Added Tax (VAT). The Soft Drinks Industry Levy, introduced in April 2018, is also excluded. 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 SIC code appropriate to the index and a four-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

Figures for the latest two months are provisional and the latest five months are normally subject to revisions in light of late and revised respondent data. Revisions to seasonal adjustment factors are re-estimated every month for the seasonally adjusted series. 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. Input PPI is driven mostly 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.

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4. Annual output inflation falls for the second consecutive month despite the monthly rate rising between July and August

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 2.9% in August 2018 (Table 1). The 12-month rate of output inflation has remained positive since July 2016. On the month, output inflation rose to 0.2%.

The largest contribution to both the annual and monthly rate for output inflation came from petroleum products.

Table 2 shows monthly and annual growth rates for output prices by product group and Figure 2 shows contributions by those product groups to the monthly and annual rate of inflation.

Petroleum products provided the largest upward contribution of 1.01 percentage points to the annual rate (Figure 2), driven by price growth of 14.4% on the year to August 2018 (Table 2). This growth was driven mainly by prices for diesel and gas oil, which rose 13.1% on the year.

Chemicals and pharmaceutical products showed the second-largest upward contribution of 0.51 percentage points to the annual rate, with the 12-month rate reaching 7.0% in August 2018, the highest it has been since April 2011.

The monthly rate of output inflation rose 0.2%, with the largest upward contribution from petroleum products (0.07 percentage points). The monthly growth for petroleum products rose 1.2 percentage points to 0.8% in August 2018.

Figure 3 shows contributions to the change in the annual rate for factory gate prices (output prices).

Six product groups provided downward contributions to the 0.2 percentage points fall in the rate between July 2018 and August 2018. The largest downward movements came from petroleum products, and clothing, textile and leather, at 0.10 and 0.07 percentage points respectively.

Computer, electrical and optical products provided the largest upward contribution to the change in rate at 0.04 percentage points.

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5. Annual inflation rate for materials and fuels bought continues to remain positive but slows in August 2018

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell to 8.7% in August 2018, down 1.6 percentage points from July 2018 (Table 3). The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven by crude oil prices, which fell to 39.4% in August 2018 from 49.6% in July 2018, but maintains 26 months of positive annual inflation.

The 1-month rate for materials and fuels was 0.5%, up from 0.0% in July 2018 (Table 3). The largest upward contribution of 0.18 percentage points came from inputs of other imported parts and equipment.

The annual rate of inflation for imported materials and fuels was 8.3% in August 2018 (Table 4), down from 9.9% in July 2018. This is the first fall in the annual rate since March 2018. Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight.

The sterling effective exchange rate index (ERI) fell 1.0% to 77.4 on the month in August 2018 (Table 4), the fourth consecutive month of negative monthly growth. On the year, the ERI increased to 2.5% in August 2018, up from 1.6% in July 2018. This increase in the annual rate can be attributed to a base-year effect, as the 1.9% fall in the monthly rate between July and August 2017 was larger than the 1.0% decrease for this year. All else equal, a weaker sterling effective exchange rate will lead to more expensive inputs of imported materials and fuels.

Table 5 shows monthly and annual growth rates for input prices by product group and Figure 4 shows contributions by those product groups to the monthly and annual rate of input price inflation.

The largest upward contribution to the annual rate in August 2018 came from crude oil, which contributed 5.78 percentage points (Figure 4) and had annual price growth of 39.4% (Table 5). The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas prices, which rose 38.6% on the year.

Fuel and imported metals provided the second- and third-largest contributions to the annual rate, with 0.94 and 0.55 percentage points respectively. Fuel prices rose 9.1% on the year, while prices for imported metals rose 6.6%.

Prices for other imported parts and equipment were the main driver to the increase in the monthly input inflation rate, with an upward contribution of 0.18 percentage points and a price growth of 1.1%.

Figure 5 shows contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices).

There was a 1.6 percentage points decrease in the annual rate for inputs between July 2018 and August 2018, with six product groups displaying downward contributions to the change in the rate. Crude oil provided the largest downward contribution of 1.12 percentage points. The second-largest downward contribution to the change in rate came from other imported metals at 0.36 percentage points.

Other imported parts and equipment, and imported food materials displayed small positive contributions of 0.08 and 0.04 percentage points respectively, while other home-produced materials made no contribution either way.

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7. Quality and methodology

The Producer Price Index (PPI) Quality and Methodology Information report 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 18 May 2018. The tables present the calculated standard errors of the PPI during the period January 2017 to December 2017, for both month-on-month and 12-month growth.

Guidance on using indices in indexation clauses (PDF, 197KB) 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 (PDF, 1.18MB) 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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