Producer price inflation, UK: May 2016

The price of goods bought and sold by UK manufacturers, as estimated by the Producer Price Index, continued to fall in the year to May 2016.

Factory gate prices (output prices) for goods produced by UK manufacturers fell 0.7% in the year to May 2016, unchanged from the year to April 2016.

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, rose 0.5% in the year to May 2016, unchanged from the year to April 2016.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) fell 3.9% in the year to May 2016, compared with a fall of 7.0% in the year to April 2016.

Core input prices, which exclude purchases from the more volatile food, beverage, tobacco and petroleum industries, fell 1.5% in the year to May 2016, compared with a fall of 2.1% in the year to April 2016.

The Producer Price Index (PPI) is a monthly survey that measures the price changes of goods bought and sold by UK manufacturers and provides an important measure of inflation, alongside other indicators such as Consumer Price Index (CPI) and Services Producer Price Index (SPPI). This statistical bulletin contains a comprehensive selection of data on input and output index series. It contains producer price indices of materials and fuels purchased, and output of manufacturing industry by broad sector.

The output price indices measure change in the prices of goods produced by UK manufacturers (these are often called “factory gate prices”).

The input price indices measure change in the prices of materials and fuels bought by UK manufacturers for processing. These are not limited to just those materials used in the final product, but also include what is required by the company in its normal day-to-day running.

The factory gate price (the output price) is the price of goods sold by UK manufacturers and is the actual cost of manufacturing goods before any additional charges are added, which would give a profit. It includes costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent.

Core factory gate inflation excludes price movements from food, beverage, petroleum, and tobacco and alcohol products, which tend to have volatile price movements. It should give a better indication of the underlying output inflation rates.

The input price is the cost of goods bought by UK manufacturers for use in manufacturing, such as the actual cost of materials and fuels bought for processing.

Core input inflation strips out purchases from the volatile food, beverage, tobacco and petroleum industries to give an indication of the underlying input inflation pressures facing the UK manufacturing sector.

Factory gate inflation fell 0.7% in the year to May 2016, unchanged from the year to April 2016.

During 2012 and 2013, core factory gate inflation tended to run at a lower rate than total output inflation and showed a smaller degree of volatility. This trend changed in 2014, as total output fell into negative inflation: a result of the downward pressures from petroleum, which is excluded from the core measure of inflation. In 2015, total output inflation has remained consistently below core output price inflation, with total output averaging a fall of 1.7% during 2015 and core output averaging growth of 0.2% in the same period (Figure A).

Looking at the latest estimates (Table A), movements in factory gate prices over the 12 months to May 2016 were as follows:

• factory gate prices fell 0.7%, unchanged from the year to April 2016.
• core factory gate prices rose 0.5%, unchanged from the year to April 2016.
• factory gate inflation excluding excise duty fell 0.6%, unchanged from the year to April 2016

Between April and May 2016:

• factory gate prices increased 0.1%, compared with an increase of 0.3% last month
• core factory gate prices showed no change, compared with an increase of 0.2% last month

Table B shows the annual percentage change in price across all product groups and Figure B shows their contribution to the annual factory gate inflation rate.

Table C shows the monthly percentage change in price across all product groups and Figure C shows their contribution to the month factory gate inflation rate.

Factory gate prices fell 0.7% in the year to May 2016, unchanged from the year to April 2016. This index has now seen negative movements since July 2014. The main contribution to the annual rate for May 2016 came from petroleum products. A fall in the price of food products, and chemicals and pharmaceuticals also contributed towards the fall in the output price of manufactured products. These falls were offset slightly by increases in the prices of other manufactured products, transport equipment, and clothing, textiles and leather (Figure B).

Petroleum product prices fell 10.0% in the year to May 2016, compared with a fall of 10.8% in the year to April 2016. This index has now seen year on year falls for 33 consecutive months (since September 2013). The main contributions to the latest fall in the annual rate came from diesel and gas oil, aviation turbine fuel and motor spirit.

Food products fell 2.9% in the year to May 2016, down from a fall of 2.0% in the year to April 2016. The main contributions to this fall came from preserved meat and meat products, other food products and dairy products with prices falling by 3.9%, 3.4% and 3.8% respectively in the year.

These decreases were offset slightly by an increase in other manufactured products which increased 1.6% in the year to May 2016, unchanged from last month. Increases in rubber and plastic products and other non-metallic mineral products contributed to this rise.

The monthly price index saw a rise of 0.1% between April and May 2016, down from a rise of 0.3% last month. Most product groups showed small monthly movements. Petroleum products (including duty) provided the largest upward contribution and food products provided the largest downward contribution to the monthly rate (Figure C).

Between April and May 2016, petroleum prices rose by 3.0%, compared with a rise of 2.6% between March and April 2016. Increases in the price of diesel and gas oil provided the main upward pressure on this index.

Food product prices fell by 0.6%, compared with a fall of 0.2% between March and April 2016. Decreases in the price of preserved meat and meat products and dairy products were the main contributors towards this decrease.

Core factory gate inflation

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum product prices, giving a measure of the underlying factory gate inflation, rose 0.5% in the year to May 2016, unchanged from last month. This was driven by increases in the price of other manufactured products, transport equipment and clothing, textiles and leather.

The index showed no movement between April and May 2016, compared with an increase of 0.2% between March and April 2016.

Output producer price index contribution to change in rate

The annual percentage rate for the output PPI in May 2016 fell 0.7%, unchanged from last month. Decreases in food products and alcohol and tobacco were offset by increases in clothing, textiles and leather and petroleum products.

Figure E shows the year-on-year growth in output PPI by grouping for the latest 2 months and the range of the price changes that have been seen in these sections since May 2015. It can be seen that the majority of output PPI indices have experienced little variance in inflation in the past 12 months. Petroleum shows the biggest decrease, as well as the biggest range of movements; ranging from falls of 19.2% in September 2015 to 10.0% in May 2016. Other manufactured products show the biggest increase, ranging from rises of 1.8% in July 2015 to 1.1% in February 2016.

Figure E: Output PPI range of movements, May 2015 to May 2016, UK

Source: Office for National Statistics

Notes:

1. nec = not elsewhere classified

Download this image Figure E: Output PPI range of movements, May 2015 to May 2016, UK

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Figure F shows the annual movements in total input prices (including materials and fuels) and core input prices (excluding purchases from food, beverage, tobacco and petroleum industries) of materials and fuels purchased by the UK manufacturing industry. Between May 2012 and June 2014, both series showed relatively similar movements. From November 2013, both series have been showing a downward trend, with total input prices falling more rapidly. There has been a significant gap in the price movements of total input prices and core input prices since November 2014, however, this gap has been narrowing in recent months. Currently there is a difference of 2.4 percentage points, compared with a maximum of 10.9 percentage points in January 2015.

Looking at the latest data (Table D), the main movements in the year to May 2016 were as follows:

• the total input price index fell 3.9%, compared with a fall of 7.0% in the year to April 2016
• the core input price index saw a fall of 1.5%, compared with a fall of 2.1% in the year to April 2016
• the price of imported materials as a whole (including crude oil) fell 2.8%, compared with a decrease of 4.3% in the year to April 2016

Between April and May 2016:

• the total input price index rose 2.6%, compared with a rise of 0.9% last month (Table D)
• the seasonally adjusted input price index for the manufacturing industry excluding the food, beverage, tobacco and petroleum industries (see Table D) rose 0.2%, compared with an increase of 0.7% last month

Notes for Input prices: summary

1. These indices include the Climate Change Levy which was introduced in April 2001.
2. These indices include the Aggregates Levy which was introduced in April 2002.

Table E and Figure G show the percentage change in the price of the main commodities groups over the year and their contributions to the total input index.

Table F and Figure H show the percentage change in the price of the main commodities groups over the month and their contributions to the total input index.

The overall input index for all manufacturing, which measures changes in the price of materials and fuels purchased by manufacturers, fell 3.9% in the year to May 2016, compared with a fall of 7.0% in the year to April 2016. The main downward contributions to the index came from crude oil with a smaller, but notable, downward contribution from imports of fuel.

The monthly input index rose 2.6% between April and May 2016, compared with an increase of 0.9% between March and April 2016. Increases in home-produced food, crude oil and imported metals were offset slightly by decreases in other imported parts and equipment, fuels and imported chemicals (see Table F and Figure H).

Crude oil annual prices have been falling since October 2013. The index fell 20.5% in the year to May 2016, compared with a decrease of 26.2% in the year to April 2016. The monthly index for crude oil rose 10.7% between April and May 2016, compared with an increase of 6.6% between March and April 2016. This is the 3rd consecutive period of month on month growth within a volatile 12 month period that has seen price movements range from an increase of 18.8% in March 2016 to a fall of 15.3% in August 2015. The main contribution to the change in both the annual and monthly indices came from imported crude petroleum and natural gas, which fell 20.2% in the year to May 2016 but rose 10.2% between April and May 2016.

Home-produced food prices increased 3.1% in the year to May 2016, compared with a fall of 13.4 % last month. This is the first increase in the annual rate for this index since September 2013. The main contribution to this movement was from crop and animal production which increased 2.9% in the year to May 2016 and 11.1% between April and May 2016.

Imported metal prices fell 2.6% in the year to May 2016, compared with a fall of 6.0% in the year to April 2016. This is the smallest decrease seen in this index since February 2015, when prices fell 1.4%. The main contribution came from imported products used in the manufacture of other basic metals and casting, which fell 6.8%, compared with a fall of 9.1% in the year to April 2016. Although this is still a significant decrease, this is the smallest fall in the index since May 2015.The prices of the majority of metals measured in the PPI have fallen significantly, with many metal market prices ending 2015 at low levels. This may have been contributed to by a reduction in growth in the Chinese economy. Until recently the Chinese economy has seen strong growth resulting in high demand for metals, which may have contributed to increased prices. Reduced demand growth resulting from a slowdown of China’s economy may have been a factor in reducing prices, alongside uncertainty about growth prospects in a number of emerging economies. However, this index has experienced increases in the month-on-month growth for 5 consecutive months. This could be partly attributed to an increase in construction activity, which has raised market expectations for steel demand, alongside other supply-side factors.

Core input price index (excluding purchases from the food, beverage, tobacco and petroleum industries)

The seasonally adjusted core input price index fell 1.6% in the year to May 2016, compared with a fall of 2.0% in the year to April 2016. Between April and May 2016 the index increased 0.2%, compared with an increase of 0.7% between March and April 2016.

The unadjusted index fell 1.5% in the year to May 2016, compared with a decrease of 2.1% in the year to April 2016. This is the smallest decrease in this index since December 2013, when prices decreased by 1.4%. The monthly index decreased 0.1% between April and May 2016, compared with an increase of 0.4% between March and April 2016.

Input producer price index contribution to change in rate

The annual percentage rate for the input PPI in May 2016 fell 3.9% compared with a decrease of 7.0% last month, resulting in a fall in the annual rate of 3.1 percentage points. The most notable upward contributions came from home produced food and crude oil (Figure I).

Figure J shows the year-on-year growth in input PPI by grouping for the latest 2 months and the range of the price changes that have been seen in these groupings since May 2015. Crude oil shows the biggest decrease, ranging from falls of 48.6% in August 2015 to 20.5% in May 2016. This is also the widest range of price movements seen in any PPI grouping in this period.

Other home-produced materials shows the biggest increase ranging from rises of 5.0% in May 2015 to falls of 0.3% in March and May 2016.

Figure J: Input PPI range of movements, May 2015 to May 2016, UK

Source: Office for National Statistics

Download this image Figure J: Input PPI range of movements, May 2015 to May 2016, UK

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Input producer prices fell 3.9% in the year to May 2016, compared with a 7.0% decrease in the year to April 2016, continuing the current trend of falling input prices. While output prices also fell in the year to May, which would suggest lower input costs continue to feed into the output prices of manufactured goods, other factors could also be supporting the output prices of manufacturers. In particular, labour costs maybe offsetting some of the fall in input prices, resulting in a more modest fall in output prices. Output producer price inflation remained unchanged in the year to May 2016, falling 0.7%.

The decline in input and output producer price inflation can be partly attributed to lower oil and petroleum prices, as the cost of crude oil, energy and refined petroleum products has continued to influence the price of manufactured goods. Crude oil prices have been on a downwards trajectory, falling from around $109 per barrel in May 2014 to around $66 per barrel in May 2015, and to around $48 per barrel by May 2016. However, oil prices have stabilised in recent months, rising by 10.6% in May 2016 compared with the previous month – the fourth consecutive month of oil prices increases¹. This could be partly attributed to an increase in demand for oil, led by India, China and Russia, while global oil supplies increased slightly, with OPEC production offsetting the continuing fall of non-OPEC production. These recent increases notwithstanding, the fall in the oil price on the year meant that oil and refined petroleum product prices accounted for 3.4 percentage points of the 3.9 fall in input producer prices in the year to may 2016 and 0.73 percentage points of the 0.7% fall in output producer prices over the same period.

Alongside recent changes in commodity prices, changes in the exchange rate may also have had an impact on producer prices. In trade-weighted terms, sterling has depreciated by 5.2% in the year to May 2016, compared with 5.9% in the year to April 2016. All else equal, a depreciation of sterling increases the prices of UK imports, with a corresponding impact on the prices paid by producers for imports. If these producers raise their prices in turn, then movements in the exchange rate can influence both input and output producer prices. Sterling has continued to depreciate against the US dollar, by 6.2% in the year to May 2016, while sterling depreciated against the euro by 7.3% over the same period. The depreciation of sterling in recent months is due to a combination of economic and financial market factors, but is likely to have included uncertainty around the EU Referendum.

This continuing depreciation of sterling against the Euro and the US dollar could be exerting upward pressure on imported food prices, as a reasonable proportion of UK food imports come from the EU and primary commodities tend to be traded on global markets in US dollars. Imported food prices increased by 2.9% in the year to May 2016, compared to a 0.1% increase in the previous month, while factory gate prices of food products have fallen by 2.3% and 2.0% over the same period. This could indicate that the increase in imported food prices may not be passing down to output food prices and therefore retailers, as supermarket price competition maintains downward pressure on food prices.

While lower commodity prices and changes in the exchange rate have had the greatest impact on producer prices, the strengthening of the UK labour market may be exerting upward pressure on output prices of manufactures. The unemployment rate amongst those aged 16 and above remained steady at 5.1% in the 3 months to March 2016, while the employment rate amongst those aged 16 to 64 increased to 74.2% during the same period. Unit labour costs – which measures the labour cost per unit of output produced – increased by 0.4% in Quarter 4 (October to December) 2015, compared with a 0.5% increase in the previous quarter (July to August).

Growth across the economy eased in the Quarter 1 (January to March) 2016, compared to the last quarter (October to December) of 2015. In particular, output in the manufacturing sector fell by 0.4%, and growth in the fourth quarter of 2015 was subdued at 0.1%. This is further evidence that manufacturing producers may well be having to limit the extent of the pass through from rising input prices as output prices remain much more stable.

Notes for Economic context

1. Taken from Financial Times

For this bulletin, Producer price index dataset Tables 8R and 9R highlight revisions to movements in price indices previously published in last month’s statistical bulletin. These are mainly caused by changes to the most recent estimates as more price quotes are received, and revisions to seasonal adjustment factors, which are re-estimated every month.

For more information about our revisions policy, see our website.

Revisions to data provide one indication of the reliability of main indicators. Table G shows summary information on the size and direction of the revisions which have been made to the data covering a 5-year period. A statistical test has been applied to the average revision to find out if it is statistically significantly different from zero. The inclusion of an asterisk (*) would show the test is significant.

Table G presents a summary of the differences between the first estimates published between 2011 and 2015 and the estimates published 12 months later. These numbers include the effect of the reclassification onto Standard Industrial Classification (SIC) 2007.

Spreadsheets giving revisions triangles of estimates for all months from February 1998 through to December 2015 and the calculations behind the averages in the table are available in the producer price inflation datasets.

Revision triangle for total output (12 months)

Revision triangle for total output (1 month)

Revision triangle for total input (12 months)

Revision triangle for total input (1 month)