1. Main points

  • The headline rate of inflation for goods leaving the factory gate (output prices) was 3.1% on the year to June 2018, up from 3.0% in May 2018.

  • Prices for materials and fuels (input prices) rose 10.2% on the year to June 2018, up from 9.6% in May 2018.

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

  • Input annual inflation increased to its highest rate since May 2017; crude oil continued to provide the largest upward contribution, despite falling on the month.

Back to table of contents

2. Things you need to know about this release

Further improvements to the Export Price Index (EPI) and Import Price Index (IPI) sample coverage has been included within this release. All of these changes are described in the November 2016 article, Improvements to the Import and Export Price Indices (IPI and EPI) and Services Producer Price Indices (SPPI). The Standard Industrial Classification (SIC) two-digit indices within this wave of improvements are:

  • (EPI) 23 and 28

  • (IPI) 01, 13, 14, 26, 27, 29 and 30

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.

Back to table of contents

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.

Back to table of contents

4. Annual output inflation rate rises slightly, with all product groups displaying a positive contribution to the annual growth rate

The annual rate of inflation for goods leaving the factory gate (output prices) rose by 0.1 percentage points to 3.1% in June 2018 (Table 1). The 12-month rate of output inflation has been positive since July 2016. Petroleum products displayed the largest annual growth, increasing from 13.4% in May 2018 to 16.3% in June 2018 (Table 2).

On the month, output inflation was 0.1%, down from 0.5% in May 2018.

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 1.10 percentage points to the annual rate (Figure 2), driven by price growth of 16.3% on the year to June 2018 (Table 2). This is the highest annual growth in this product group since March 2017, and was driven mainly by prices for diesel and gas oil, which rose 16.6% on the year.

Chemicals and pharmaceuticals showed the second-largest upward contribution to the annual rate (0.39 percentage points). The 12-month rate increased from 5.2% in May 2018 to 5.3% in June 2018, the highest annual growth seen in this product group since September 2011.

The largest upward contribution to the monthly rate of output inflation came from transport equipment, which increased by 0.3 percentage points to 0.5% in June.

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

There was a 0.1 percentage points rise in the annual rate between May 2018 and June 2018, with six product groups displaying small upward contributions to the change in the rate. The largest upward movement came from petroleum products at 0.08 percentage points.

Back to table of contents

5. Annual inflation rate for materials and fuels bought rises to its highest value for 13 months, driven by crude oil prices

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose to 10.2% in June 2018, which is up 0.6 percentage points from May 2018 (Table 3). The 12-month rate of input inflation has been positive since July 2016, and this is the highest the rate has been since May 2017. The annual rate was driven by crude oil prices, which increased to 50.7% on the year in June 2018, up from 43.1% in May 2018.

The one month rate for materials and fuels slowed to 0.2% in June 2018, down from 3.3% in May 2018. (Table 3). Although the monthly rate has slowed in the most recent period, this is the third consecutive month of positive monthly inflation after prices were flat in March 2018.

The annual rate of inflation for imported materials and fuels was 9.3% in June 2018 (Table 4), up from 9.0% in May 2018. Imported materials and fuels have now shown positive annual inflation for 25 consecutive months and this is the highest the rate has been since June 2017. On the month, inflation for imported materials and fuels was 0.4%, down from 3.6% in May 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 by 0.4% to 78.5 in June 2018. 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 June 2018 came from crude oil, which contributed 7.08 percentage points (Figure 4) and had annual price growth of 50.7% (Table 5), up from 43.1% last month. This increase in the crude oil annual rate is due to a base year effect. In June 2018 crude oil prices decreased on the month by 0.1%; during the same period last year however, crude oil prices showed a larger fall on the month (5.1%).

The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas prices, which rose 48.4% on the year.

Fuel and imported metals provided the second- and third-largest contributions to the annual rate, with 1.02 and 0.94 percentage points respectively. Fuel prices rose 9.7% on the year, while prices for imported metals rose 11.5%.

Imported metal prices were the main driver to the increase in the monthly input inflation rate, with an upward contribution of 0.15 percentage points and a price growth of 1.9%.

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 0.6 percentage points increase in the annual rate for inputs between May 2018 and June 2018, with five product groups displaying upward contributions to the change in the rate. Crude oil provided the largest upward contribution of 0.78 percentage points. Fuel and imported food materials provided the second- and third-largest upward contributions to the change in rate, at 0.26 and 0.16 percentage points respectively.

Four product groups provided a negative contribution to the change in the rate, with other imported parts and equipment displaying the largest downward contribution of 0.28 percentage points.

Back to table of contents

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 20 March 2017. The article presented the calculated standard errors of the 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 (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.

Back to table of contents