1. Main points

  • The annual rate of inflation for goods leaving the factory gate slowed for the third time this year, mainly as a result of 2016 price movements dropping out of the annual comparison.

  • Factory gate prices (output prices) rose 3.2% on the year to July 2017, from 3.3% in June 2017, which is a 0.5 percentage points decline from their recent peak of 3.7% in February and March 2017.

  • Prices for materials and fuels (input prices) rose 6.5% on the year to July 2017, from 10% in June 2017; as per factory gate prices, the drop in July’s rate is due to 2016 price movements dropping out of the annual comparison.

  • Food production continued to be the main source of upward contributions to input and output price inflation fuelled by rising prices for home food materials and food products respectively.

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2. Things you need to know about this release

The data in this release refer to the first full year comparison of prices (July 2016 to July 2017) for the manufacturing sector covering the period after the EU referendum vote held in June 2016.

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 continued to fall back sharply from its recent peak at the start of 2017

The annual rate of inflation for materials and fuels purchased by manufacturers has now fallen by 13.4 percentage points from its recent peak of 19.9% in January 2017. The annual rate in July 2017 was 6.5%, which is the slowest the rate has grown since July 2016 when it was 4.2%. Between June and July 2017, the annual rate fell 3.5 percentage points, which is the largest downward movement in a single month since April 2012. The large drop in the rate in July 2017 is a result of 2016 price movements dropping out of the annual comparison. For more analysis please see section 4 of the August edition of Prices economic commentary.

The 1-month rate for materials and fuels was flat between June and July 2017, although did experience monthly falls between March and June 2017. The 1-month rate in July 2017 is the sixth consecutive period that the rate has not grown and the longest period of no growth since January 2015, when prices had not grown for eight consecutive periods.

Movements in prices of crude oil across 2016 and 2017 combined with an appreciation in the value of sterling are the main factors for the slowing rate of annual inflation for materials and fuels since January 2017. According to the World Bank, the overall average global price for crude oil fell from US $54.4 per barrel in February 2017 to $47.7 in July 2017, a decline of 12% over the period. Large price movements for crude oil in 2016 have also been dropping out of the annual comparison in recent months. As reported in Figure 3 of our May and June 2017 releases crude oil provided the largest downward contribution to the change in the annual rate, with 2.63 and 1.65 percentage points respectively.

The annual rate of inflation for imported materials and fuels was up 6.0% in July 2017, which is lower than the annual rate for overall inflation for materials and fuels, which stood at 6.5% (Table 1). Inflation from imported materials and fuels increased at a faster rate than overall inflation for materials and fuels across the whole of 2016, whereas in the first 7 months of 2017 imports have grown faster on only three occasions.

Since October 2016, the sterling effective annual rate has appreciated from a decline of 18.4% to a decline of 3.0% in July 2017. All else equal, a stronger sterling exchange rate will lead to cheaper inputs of imported materials and fuels.

Since January 2017, most of the change to the annual rate for imported fuels and materials can be explained by 2016 price movements dropping out of the annual comparison. In July 2017, the 1-month rate was flat, while the change to the annual rate was down 4.2 percentage points, which was driven by a large upward movement to prices in July 2016 (Table 2).

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 July 2017 came from home food materials, which contributed 1.82 percentage points on the back of annual price growth of 13.1% (Table 3). Within home food materials the largest upward contribution came from crop and animal production, with prices rising 12.3% on the year to July 2017.

Imported metals and crude oil provided the second and third largest contributions to the annual rate, with 1.24 and 1.04 percentage points respectively. Prices for imported metals rose 16.4% on the year, while prices for crude oil rose 7.6%.

The largest upward contribution to the monthly rate, of 0.11 percentage points, came from imported metals (Figure 2), driven by price growth of 1.3% between June and July 2017 (Table 3). The main contributor to the rise was imported products used in the manufacture of other basic metals and casting.

Figure 3 shows percentage point contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices). All industries showed downward changes in contributions to the annual rate. The largest downward change in contribution of 0.87 percentage points came from other imported parts and equipment.

The second and third largest downward change in contributions came from imported metals and imported chemicals, with 0.58 and 0.57 percentage points respectively.

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5. Pre-referendum movements dropping out of the annual comparison is the main reason for the annual rate of factory gate inflation slowing in recent months

The annual rate of inflation for goods leaving the factory gate (output prices) fell for the third time this year in July 2017. The annual rate was 3.2% in July 2017, falling from a peak of 3.7% in February and March 2017 (Table 4). July’s figure is the slowest rate of increase since December 2016.

While the annual rate has slowed this year, growth in July 2017 is still above average over the past 12 months. The average rate across the past 12 months was 2.6%, which compares with 3.2% in July 2017.

The main reason for the slowdown in the annual rate of inflation in recent months is 2016 price movements dropping out of the annual comparison. For further analysis please see section 4 of this month’s Prices economic commentary.

Falling input costs for the manufacturing sector in recent months (Table 1) have contributed to slowing price growth at the factory gate, but has not yet led to an overall price decline. The 1-month rate has slowed this year but has not turned negative. Since May 2017, the 1-month rate has grown a cumulative 0.2 percentage points, compared with 1.0 percentage point across the preceding 3 months. This could be due to the fact that unit labour costs for manufacturers have grown more strongly than factory gate prices over the past year. For further analysis please see section 6 of this month’s Prices economic commentary.

Figure 4 shows contributions by industry to the monthly and annual rate of factory gate price inflation (output prices). All industries showed upward contributions to the annual rate. Food products provided the largest upward contribution of 0.91 percentage points (Figure 4). Prices for food products rose 5.8% on the year to July 2017 (Table 5), which is the joint highest annual increase since December 2011. Annual growth has mainly been driven by dairy products, with prices up 17.9% on the year to July 2017. For further analyses on food prices please refer to section 6 of the May release and section 4 of the January release.

Computer, electrical and optical, and transport equipment showed the second and third largest contributions, with 0.41 and 0.35 percentage points respectively. Prices within computer, electrical and optical grew 3.4% on the year to July 2017 (Table 5), which was the joint highest annual increase since November 2008.

Petroleum products provided the largest downward contribution to the monthly rate, at 0.03 percentage points. The effect of rising prices for petroleum products, which was a major driver of annual inflation in the second half of 2016 and early 2017, has diminished in recent months. Annual price growth for petroleum products has fallen from a peak of 23.6% in February 2017 to 3.5% in July. Month-on-month growth has also been negative across each of the last five periods. Falling prices for inputs of crude oil is the main factor as crude is the main input used in the manufacture of petroleum products.

Figure 5 shows contributions to change in the annual rate of growth for factory gate prices (output prices). The overall rate fell 0.1 percentage points between June and July 2017, which was driven mainly by a change in contributions for chemicals and pharmaceuticals, and transport equipment. Contributions from both industries each fell by 0.08 percentage points, which was somewhat offset by other manufactured products, which provided the largest upward change in contribution of 0.08 percentage points.

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7. 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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