Producer price inflation, UK: August 2020

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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Contact:
Email Emelia D'Silva-Parker

Release date:
16 September 2020

Next release:
21 October 2020

1. Main points

  • The headline rate of output inflation for goods leaving the factory gate was negative 0.9% on the year to August 2020, unchanged from June 2020.

  • The price for materials and fuels used in the manufacturing process displayed negative growth of 5.8% on the year to August 2020, down from negative growth of 5.7% in July 2020.

  • Petroleum products was the largest downward contributor to the annual rate of output inflation.

  • The largest downward contribution to the annual rate of input inflation was from crude oil.

  • November 2020 will see the first publication of the producer price inflation figures on a gross basis; we encourage the use of gross sector indices where available, as the net versions will no longer be produced; Section 6: Gross and net producer price indices has more information on this change.

  • The Office for National Statistics (ONS) has released a public statement on the coronavirus (COVID-19) and production of statistics; Section 8: Quality and Methodology describes the situation in relation to producer price inflation (PPI).

  • In November 2020, we will also be implementing important methodological improvements to PPI by moving to an annually chain-linked basis; Section 2: Things you need to know about this release describes this in more detail.

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2. Things you need to know about this release

Coronavirus in August 2020

On 23 March 2020, the UK and devolved governments announced official guidance on restrictions on movement for the UK as a result of the coronavirus (COVID-19) pandemic. Data collection for the Producer Price Index (PPI) surveys, including the surveys measuring domestic, import and export prices for August 2020, was via paper questionnaires that were sent to businesses on 23 July 2020, asking to return prices that were applicable on or around 1 August 2020.

Although there has been a gradual reopening of workplaces and premises since May 2020, as a result of the lifting of government restrictions, the response for August 2020 is lower in comparison with pre-lockdown months. The response for August 2020 was 73.7%, down from a pre-lockdown 87.4% in February 2020. We closely monitor response rates in each publication and use statistical methods to deal with non-response. For further information, please see Section 8: Quality and Methodology.

We have worked closely with our business respondents and data suppliers, and we have used additional data sources to quality assure the estimates in this publication. These include qualitative information sourced from manufacturing industry respondents to the Business Impact of Coronavirus (COVID-19) Survey (BICS) and anecdotal evidence from responders to both the BICS and/or PPI surveys.

Merging SPPI with PPI

To ensure the accessibility of producer prices to users, we will be implementing a new bulletin that collates information from the Services Producer Price Index (SPPI) and Producer Price Index (PPI) in October 2020 – Producer price inflation including services, UK. The methodology, data collection and production of the PPI and SPPI will not be affected as a result of this change.

Annual chain linking

We will be implementing important methodological improvements to the PPI and SPPI in November 2020. Articles published on 20 July 2020 have detailed changes in methodology, Producer price indices methods changes and the move to an annual chain-linked business prices structure, Annual chain-linking in business prices.

Further articles explain moving from fixed-base weights to annual chain-linking, which will improve the accuracy of these statistics; Producer price weight changes and Services producer price weight changes.

Moving from net to gross

As we introduce annual chain-linking, we will be implementing changes to the level of detail of the data we publish and classification changes alongside changes to our producer price inflation headline figure from net to gross in line with international best practice. The net sector indices will cease to be included in our published data.

To support users with the transition to the new headline definition, Section 6: Gross and net sector price indices includes a comparison between the existing measures of output and input producer price inflation on a net and gross basis.

The move to gross sector inputs will also see a shift in composition of the headline input rate. Where currently around 67% of the net sector input is made up of imports, the gross sector input series is composed of 76% domestic inputs and 24% imported inputs. This is because of the inclusion of intra-industry transactions, which are included within the gross sector input series.

Classification change

The November 2020 PPI bulletin will be published for the first time using Classification of Products by Activity 2.1 (CPA 2.1) framework. The PPI data are currently aggregated using a CPA 2008 classification system, CPA 2.1 is the most up-to-date international product classification system, reflecting product change over time.

About the PPI

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, and 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 in the domestic market. It is not limited to materials used in the final product but it 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 statistics.

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 (SDIL), 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 PPI has two unique identifiers: a 10-digit index number, which relates to the Standard Industrial Classification 2007 (SIC 2007) code appropriate to the index, and a four-character alpha-numeric code (series ID), which can be used to find series when using the time series dataset for producer price inflation.

Figures for the latest two months are provisional, and the latest five months are subject to revisions taking account 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 (PPIs) over the past 15 years. Input producer price inflation is driven mostly by commodity prices, which tend to be more volatile over time, compared with prices for finished goods (output producer price inflation). Input producer price inflation 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. The annual output inflation rate shows negative growth for the fifth consecutive month

The annual rate of inflation for goods leaving the factory gate (output prices) remains at negative 0.9%, unchanged from June 2020 (Table 1). This is the fifth consecutive month that the rate has been negative, following 45 consecutive months of positive annual inflation.

On the month, the rate of output inflation was a flat 0.0% in August 2020, a decrease of 0.3 percentage points from July 2020.

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

Of the 10 product groups, three provided negative contributions to the output annual rate.

Petroleum provided the largest downward contribution of 1.26 percentage points to the annual rate (Figure 2) and had negative annual price growth of 17.7% on the year to August 2020 (Table 2). This is the seventh consecutive month that the annual rate for petroleum has been negative. The negative rate in August 2020 was driven by diesel and gas oil, which at negative 14.3% on the year was down 0.4 percentage points from July 2020.

Price movements for petroleum products broadly follow trends seen in crude oil over recent months and likely reflect both demand and supply side factors during the ongoing coronavirus (COVID-19) pandemic. These include continued weak global demand for crude oil and petroleum products compared with a year ago, which have been partially offset by cuts to crude oil output.

Chemicals and pharmaceuticals displayed the second-largest negative contribution, of 0.12 percentage points to the annual rate, with negative annual growth of 1.8% in August 2020. The annual rate for this product group has remained negative for 14 consecutive months and is driven by basic chemicals, fertilisers and nitrogen compounds; plastics and synthetic rubber in primary forms, which had negative growth of 3.6% in August.

Of the seven product groups that provided a positive contribution to the annual rate, tobacco and alcohol provided the largest, at 0.24 percentage points. The annual rate for tobacco and alcohol rose by 2.7% on the year to August 2020.

On the month, output inflation was a flat 0.0%. Petroleum products displayed the largest contribution, at negative 0.04 percentage points, with prices decreasing by 0.6% on the month in August 2020. This is the first time the rate has been negative since May 2020 for this product group.

Figure 3 shows contributions to the change in the annual rate for factory gate prices (output prices). In August 2020, these contributions offset each other leading to no change in the annual rate.

Of the 10 product groups, four displayed positive contributions to the change in the rate, with food products providing the largest, at 0.06 percentage points (Figure 3) while other manufactured products, paper and printing, and computer, electrical and optical made up the rest.

These were offset by negative contributions from six other industry sectors, the largest coming from transport equipment, petroleum products, and metal, machinery and equipment.

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5. The annual rate of input inflation continues to display negative growth for the seventh consecutive month

The annual rate of input inflation fell to negative 5.8% in August 2020, down from negative 5.7% in July 2020 (Table 3).

The monthly rate for materials and fuels purchased was negative 0.4% in August 2020, down 2.2 percentage points from 1.8% in July 2020.

The annual rate of inflation for imported materials and fuels was negative 6.6% in August 2020 (Table 4), down 0.8 percentage points from July 2020 when it was negative 5.8%. The monthly rate was negative 0.4% in August 2020, which has decreased 2.4 percentage points from 2.0% in July 2020. Imported materials and fuels roughly represent two-thirds of materials and fuels purchased (input prices) in terms of index weight.

The Sterling effective exchange rate index (ERI) rose 1.6% on the month in August 2020. On the year, the ERI displayed positive growth of 4.5% in August 2020, which is up 3.2 percentage points from 1.3% in July 2020, and is the highest we have seen since December 2019. All else being equal, a rise in the value of sterling would be expected to make the cost of imports less expensive.

Figure 4 shows contributions by product group to the monthly and annual rate of input inflation, and Table 5 shows monthly and annual growth rates by product group.

Of the nine product groups, seven provided negative contributions to the input annual rate.

The largest negative contribution to the annual rate came from crude oil, which contributed 5.22 percentage points (Figure 4) and had negative annual price growth of 30.8% (Table 5). This is the seventh consecutive month that the rate has been negative.

PPI prices for crude oil typically reflect a range of factors, including geopolitical events around the world as well as local refineries’ market conditions. Prices for crude oil fell on the year in August 2020 at negative 30.8% and followed the trend of a slowdown in negative growth of the 12-month rate seen since April 2020. This reflected several market conditions including limited supply and increased global demand for crude oil as trade and travel restrictions were relaxed. Crude oil prices fell slightly between July and August 2020, having previously risen each month since April 2020, likely reflecting that market conditions were broadly unchanged on the month.

Imported chemicals provided the second-largest negative contribution to the annual rate, at 0.88 percentage points, with negative price growth of 6.5%. The annual rate for this product group has remained negative for 14 consecutive months. This was driven by imported products used in the manufacture of petrochemicals, which displayed negative growth of 8.6% in August 2020.

Other imports provided the third-largest negative contribution to the annual rate, with a contribution of 0.52 percentage points and negative price growth of 5.8%.

On the month, six of the nine product groups provided downward contributions to the rate. Home food materials provided the largest downward contribution of 0.26 percentage points. Two product groups provided positive contributions to the rate with imported metals providing the largest upward contribution of 0.28 percentage points.

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

Of the nine product groups, five displayed negative contributions to the change in the annual rate.

The annual rate for input prices fell by 0.1 percentage points, from negative 5.7% in July 2020 to negative 5.8% in August 2020.

Inputs of other imported parts and equipment provided the largest negative contribution to the change in the rate, with 0.38 percentage points. The annual rate for this product group fell 2.3 percentage points, from 0.5% in July 2020 to negative 1.8% in August 2020.

Other imported materials provided the second-largest negative contribution to the change in the rate, at 0.22 percentage points, falling from negative 3.1% in July 2020 to negative 5.8% in August 2020.

Further negative contributions came from imported chemicals, imported food materials and other home-produced materials. The downward contributions to the change in the rate were offset by positive contributions from the remaining product groups, with crude oil providing the largest contribution at 0.37 percentage points. This upward contribution to the change in the rate from crude oil reflects a base effect, as whilst crude oil fell by 1.6% between July and August 2020, it fell by a much bigger amount between the same months last year.

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6. Gross and net producer price indices

Producer Price Indices (PPIs) are measured on two different bases: gross and net of inter-sector sales. Gross sector PPIs include products sold by one business to another business classified to the same industry sector. Net sector PPIs exclude (net out) products sold by a business to another business classified to the same industry sector. The Office for National Statistics (ONS) currently headlines with net sector PPIs, which include duty. We will move our headline to a gross sector basis excluding duty after November 2020, in line with international best practice.

Figure 6 shows net and gross output PPIs over the past 10 years. In August 2020, the net output PPI was 115.1 while the gross output excluding duty PPI was 113.5.

Gross and net sector output PPIs display similar trends over time, although the gross indices show higher volatility, particularly at times of high inflation, either positive or negative (Figure 7).

For the net output PPI, the annual growth fell to negative 0.9% in August 2020, no change from negative 0.9% in July 2020. For the gross output excluding duty PPI, the annual growth in August 2020 was negative 3.2%, down from negative 3.1% in July 2020.

Figure 8 shows the net and gross input PPIs over the past 10 years. The trends of the PPIs are similar, although the net input PPI appears more volatile than the gross input PPI. In August 2020, the net input PPI was 110.8 while the gross input PPI was 113.3.

Figure 9 also shows that the annual growth rates for the net input PPI are more volatile than for the gross input PPI. For the net input PPI, the annual growth was negative 5.8% in August 2020, down from negative 5.7% in July 2020. For the gross input PPI, the annual growth in August 2020 was negative 2.8%, up from negative 2.9% in July 2020.

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8. Quality and methodology

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Producer Price Indices (PPIs) QMI.

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 between January and 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 PPIs, including the import and export index, is available. PPIs methods and guidance (PDF, 1.14MB) provides an outline of the methods used to produce the PPIs as well as information about recent PPI developments.

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

The detailed input indices of prices of materials and fuels purchased by industry (producer price inflation 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.

Coronavirus

As highlighted in Section 2: Things you need to know about this release, the coronavirus (COVID-19) pandemic has impacted on response rates in this release and is likely to be a factor in reduced response for future releases.

Table 6 shows the response rates to the domestic (PPI), export (Export Price Index (EPI)) and import (Import Price Index (IPI)) price surveys at time of publishing for each reference period. Response rates were lower in April, May, June, July and August 2020 compared with other months. Response rates for the EPI and IPI show a small improvement in August 2020 compared with July 2020. However, response rates for the main PPI show there was a slight fall of around 0.5 percentage points in August 2020 compared with July 2020.

The low response rates in August 2020 are unlikely to have had a substantial impact on the headline PPI figures. However, the smaller sample sizes are likely to have increased volatility for some of the lower-level indices, particularly among IPIs and EPIs. Revisions are also likely to be larger than usual over the next few months.

Producer prices are normally imputed for non-response by using ratio imputation. The ratio imputation method calculates the growth within an index based on prices that have been returned and then applies it to the last known value for the missing price. This method ensures that if prices for a group of products increase (decrease) from one month to the next, the imputed values for non-respondents in that product group will also increase (decrease) when compared with the last known value.

In a small number of cases, prices may be manually imputed by directly using the latest available price from the latest available period. This method is applied when the nature of the product or previous information from respondents indicate that a price change is unlikely (that is, long-term contracts and fixed listing prices).

These are simple but effective methods, used as a standard internationally (PDF, 5.87MB) and recommended by international organisations specifically for treatment of missing producer prices because of the coronavirus pandemic (PDF, 52KB).

Links to additional ONS sources of coronavirus information

Various articles have been published that help describe the ONS response to how the coronavirus might be seen in our estimates:

Our latest data and analysis on the impact of the coronavirus on the UK economy and population are also available.

The Office for National Statistics (ONS) has released a public statement on the coronavirus and the production of statistics, and any specific queries on this can be directed to the Media Relations Office.

After EU withdrawal

As the UK leaves the EU, it is important that our statistics continue to be of high quality and are internationally comparable. During the transition period, those UK statistics that align with EU practice and rules will continue to do so in the same way as before 31 January 2020.

After the transition period, we will continue to produce our inflation statistics in line with the UK Statistics Authority’s Code of Practice for Statistics and in accordance with internationally agreed statistical guidance and standards.

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Contact details for this Statistical bulletin

Emelia D'Silva-Parker
business.prices@ons.gov.uk
Telephone: +44 (0)1633 456907