Producer price inflation, UK: March 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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This is an accredited national statistic.

Contact:
Email Martina Portanti

Release date:
22 April 2020

Next release:
20 May 2020

1. Main points

  • The headline rate of output inflation for goods leaving the factory gate was 0.3% on the year to March 2020, down from 0.5% in February 2020.

  • The price for materials and fuels used in the manufacturing process displayed negative growth of 2.9% on the year to March 2020, down from negative growth of 0.2% in February 2020.

  • Petroleum products made the largest downward contribution to the change in the annual rate of output inflation.

  • Crude oil provided the largest downward contribution to the change in the annual rate of input inflation.

  • Crude oil prices have seen a record fall on the month, driven by factors including reduced global demand during the coronavirus (COVID-19) pandemic and OPEC+ failing to agree to cut supply.

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2. Things you need to know about this release

The Office for National Statistics (ONS) will be implementing important methodological improvements to the Producer Price Index (PPI) and Services Producer Price Index (SPPI) by summer 2020. These include moving from fixed-base weights to annual chain-linking, which will improve the accuracy of these statistics. At the same time, we will be introducing changes to the level of detail of the data we publish and changes to our producer price inflation headline figure from net to gross in line with international best practice. To support users with the transition to the new headline definition, Section 6 includes a comparison between the existing measures of output and input producer price inflation on a net and gross basis.

We will pre-announce the exact date when these changes will be implemented over the coming few months to give users as much notice as possible.

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. Annual output inflation slowed to its lowest rate since July 2016

The annual rate of inflation for goods leaving the factory gate (output prices) slowed to 0.3% in March 2020, from 0.5% in February 2020 (Table 1). The annual rate has now remained positive for 45 consecutive months, last showing negative growth in June 2016.

On the month, the rate of output inflation was negative 0.2% in March 2020, unchanged from February 2020. The monthly rate has been negative for six of the last seven months.

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, seven provided positive contributions to the output annual rate.

Transport equipment provided the largest upward contribution, of 0.23 percentage points, to the annual rate (Figure 2), with price growth of 1.9% on the year to March 2020 (Table 2). The annual rate for this product group has remained positive since January 2016. This was driven by other transport equipment, which was up 5.5%, the highest the rate has been since October 1999.

Other manufactured products displayed the second-largest upward contribution, of 0.19 percentage points, to the annual rate, with annual growth of 1.3% in March 2020. The annual rate for this product group has remained positive since June 2000.

Of the three product groups that provided a negative contribution to the annual rate, petroleum products provided the largest, at 0.50 percentage points. The annual rate for petroleum products fell 6.6% on the year to March 2020, down from negative 1.3% in February 2020. This is the lowest the annual rate has been since May 2016. This fall follows the drop in crude oil prices in February 2020, which is now feeding through to petroleum products in March 2020.

On the month, output inflation was negative 0.2%, with only petroleum products, and chemicals and pharmaceuticals displaying downward contributions, at 0.43 and 0.02 percentage points respectively. Prices for petroleum products fell 4.5% on the month in March 2020, the lowest the monthly rate has been since December 2018.

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

There was a 0.2 percentage point decrease in the annual rate for output prices, from 0.5% in February 2020 to 0.3% in March 2020. Of the 10 product groups, only three displayed downward contributions to the change in the rate, with petroleum products providing the largest, at 0.27 percentage points (Figure 3).

Clothing, textile and leather, and food products provided smaller downward contributions to the change in the rate, at 0.02 and 0.01 percentage points respectively.

The other product groups provided either small upward contributions or no contribution to the change in the rate.

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5. Monthly input inflation fell to its lowest rate since January 2015

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell by 2.9% in March 2020, down from negative 0.2% in February 2020. This is the lowest the rate has been since October 2019 and the sixth time in the last eight months that the rate has been negative.

The monthly rate for materials and fuels purchased was negative 3.6% in March 2020, down from negative 0.9% in February 2020. This is the lowest the rate has been since January 2015.

The annual rate of inflation for imported materials and fuels was negative 2.0% in March 2020 (Table 4), which is down 2.9 percentage points from February 2020 when it was 0.9%. The monthly rate was negative 2.8% in March 2020, down from a flat 0.0% in February 2020. This is the lowest the monthly rate has been since January 2015. 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 4.7% on the month in March 2020, the biggest monthly drop since October 2016. On the year, the ERI also displayed negative growth in March 2020, with the annual rate falling 6.2 percentage points, from 2.4% in February 2020 to negative 3.8% in March 2020. This is the lowest the annual rate has been since June 2017 (source: Bank of England).

All else being equal, a weaker sterling effective exchange rate will lead to more expensive inputs of imported materials and fuels. This likely explains why most imported components of input PPI saw positive price growth, both on the month and the year, to March 2020.

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, three provided negative contributions to the input annual rate.

The largest downward contribution to the annual rate came from crude oil, which contributed 6.23 percentage points (Figure 4) and had negative annual price growth of 36.7% (Table 5). This is the lowest the annual rate has been since February 2016. This downward contribution was driven by imported crude petroleum and natural gas, which was down 33.1%. The average price for world crude oil was US $32 per barrel in March 2020, the lowest it has been since February 2016 (source: World Bank)

Prices for crude oil typically reflect a range of factors, including geopolitical events around the world. The very large fall in prices in March 2020 reflects several market conditions including a failure of the Organization of the Petroleum Exporting Countries plus group (OPEC+) countries to agree to further supply cuts in early March, and reduced global demand for crude oil during the coronavirus (COVID-19) pandemic.

By March 2020, COVID-19 had spread and led more countries to impose restrictions on activity including work and travel, further reducing the global demand for oil. These exceptional global conditions have contributed to a record monthly fall in prices for the crude oil component of input PPI, which fell by 29.5% on the month, the largest fall ever recorded since the series began in January 1996.

Imported chemicals provided the second-largest downward contribution to the annual rate, at 0.30 percentage points, with negative price growth of 2.3%. The annual rate for this product group has remained negative for nine consecutive months. The annual rate for imported chemicals has been driven by imported products used in the manufacture of petrochemicals, whose prices fell by 5.6% on the year to March 2020. Prices for this product group tend to follow those for crude oil prices, and are therefore likely being driven by the same market conditions.

The largest upward contribution to the annual rate came from imported metals, with a contribution of 1.48 percentage points and positive price growth of 17.7%. The annual rate for this product group has remained positive for 45 consecutive months. This growth has largely been driven by precious metals including platinum, palladium and rhodium, which are all used in the production of catalytic converters.

On the month, imported metals and fuels were the only product groups other than crude oil to provide a downward contribution, at 0.17 and 0.12 percentage points respectively.

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

The annual rate for input prices fell by 2.7 percentage points, from negative 0.2% in February 2020 to negative 2.9% in March 2020. Of the nine product groups, only two displayed downward contributions to the change in the rate.

Crude oil provided the largest downward contribution to the change in the rate, at 4.98 percentage points. The annual rate of crude oil fell by 28.7 percentage points, from negative 8.0% in February 2020 to negative 36.7% in March 2020.

Imported metals provided the only other downward contribution to the change in the rate, at 0.27 percentage points.

Fuel provided the largest upward contribution to the change in the rate, at 0.76 percentage points. This is largely a base effect as prices for both electricity and gas fell on the month but by less than in the same month a year ago. This recent price fall is largely driven by gas, which has seen oversupply of liquefied natural gas and reduced demand both from mild weather and reduced output from firms during the coronavirus (COVID-19) pandemic.

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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 by summer 2020, in line with international best practice.

Figure 6 shows net and gross output PPIs over the past 10 years. In March 2020, the net output PPI was 115.5 while the gross output excluding duty PPI was 115.4.

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 was 0.3% in March 2020, down from 0.5% in February 2020. For the gross output excluding duty PPI, the annual growth in March 2020 was negative 0.3%, down from 0.6% in February 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 March 2020, the net input PPI was 112.4 while the gross input PPI was 114.0.

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 2.9% in March 2020, down from negative 0.2% in February 2020. For the gross input PPI, the annual growth in March 2020 was negative 1.3%, down from negative 0.3% in February 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 QMI.

If you would like more information about the reliability of the data, a Producer Price Index (PPI) standard errors article was published on 18 May 2018. The tables present the calculated standard errors of the PPI between January 2017 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 (COVID-19)

During the coronavirus (COVID-19) pandemic, we are working to ensure that we continue to publish PPI and the Services Producer Price Index (SPPI). The price collection for this month’s publication has been largely unaffected. As this situation evolves, we are developing several solutions to meet potential scenarios depending on the amount of data that is able to be collected both through our in-house surveys and by our external data suppliers to ensure we are still able to produce the publications over the coming months. These include considering incorporating less data into the indices, using the previous month’s movements to construct the latest estimates and reducing the level of detail published. Users will be informed of any changes to how the data are measured.

The Office for National Statistics has released a public statement on the coronavirus and the production of statistics.

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

Martina Portanti
business.prices@ons.gov.uk
Telephone: +44 (0)1633 456907