1. Main points

  • The headline rate of inflation for goods leaving the factory gate (output prices) was 2.9% on the year to May 2018, up from 2.5% in April 2018.

  • Prices for materials and fuels (input prices) rose 9.2% on the year to May 2018, up from 5.6% in April 2018.

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

  • Input annual inflation increased to its highest rate since June 2017; crude oil continued to provide the largest upward contribution.

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2. Things you need to know about this release

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.

Each Producer Price Index (PPI) has two unique identifiers: a 10-digit index number, which relates to the SIC code appropriate to the index and a four-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

Figures for the latest two months are provisional and the latest five months are normally subject to revisions in light of late and revised respondent data. In this release, the latest six months have been revised following an error identified in the April 2018 PPI statistical bulletin. 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 (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.

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4. Annual output inflation rate picks up for the first time in six months

The annual rate of inflation for goods leaving the factory gate (output prices) rose by 0.4 percentage points to 2.9% in May 2018 (Table 1). The 12-month rate of output inflation has been positive since July 2016, but this is the first time the rate has picked up since November 2017.

On the month, output inflation was 0.4%, unchanged from April 2018.

Table 2 shows monthly and annual growth rates for output prices by industry and Figure 2 shows contributions by those industries to the monthly and annual rate of inflation.

Petroleum products provided the largest upward contribution of 0.89 percentage points to the annual rate (Figure 2), driven by price growth of 12.4% on the year to May 2018 (Table 2). The annual growth of petroleum products was driven mainly by prices for diesel and gas oil, which rose 13.7% on the year.

Chemicals and pharmaceuticals showed the second-largest upward contribution to the annual rate (0.37 percentage points). The 12-month rate increased from 4.6% in April 2018 to 4.9% in May 2018, which is the highest annual growth in this sector since October 2011.

The largest upward contribution to the monthly rate of output inflation came from petroleum prices, which increased by 4.3% compared with April 2018.

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

There was a 0.4 percentage points rise in the annual rate between April 2018 and May 2018, with five product groups displaying upward contributions to the change in the rate. The largest upward movement came from petroleum products at 0.52 percentage points. Other manufactured products, chemicals and pharmaceuticals, transport equipment, and paper and printing products all provided small upward contributions.

Four industries provided a negative contribution to the change in the rate, with the largest downward contribution coming from food products at 0.20 percentage points.

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5. Annual inflation rate for materials and fuels bought rises to its highest value for 11 months, driven by large increases in crude oil prices

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose to 9.2% in May 2018, which is up 3.6 percentage points from April 2018 (Table 3). The 12-month rate of input inflation has been positive since July 2016, but this is the highest the rate has been since June 2017. The annual rate was driven by crude oil prices, which have increased on the year by 40.2% in May 2018, up from 20.1% in April 2018.

The one-month rate for materials and fuels increased by 2.2 percentage points to 2.8% in May 2018 (Table 3). This is the second consecutive month of positive monthly inflation after prices were flat in March 2018 and the highest the monthly rate has been since October 2016. The monthly rate of input inflation was also driven by crude oil prices, which increased by 10.4% on the month (Table 5).

The annual rate of inflation for imported materials and fuels was 8.7% in May 2018 (Table 4), up from 4.5% in April 2018. Imported materials and fuels have now shown positive annual inflation for 24 consecutive months and this is the highest the rate has been since June 2017. On the month, inflation for imported materials and fuels was 3.4%, up from 0.5% in April 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 to 78.8 in May 2018. The one-month rate was a negative 1.9% in May 2018, which is the first monthly drop since August 2017. On the year, the ERI was 0.1% in May 2018, down from 2.6% in April 2018. All else equal, a weaker sterling effective exchange rate will lead to more expensive inputs of imported materials and fuels. This may have contributed in part to the increase in the annual and monthly rates of inflation for imports in May 2018.

Table 5 shows monthly and annual growth rates for input prices by industry and Figure 4 shows contributions by those industries to the monthly and annual rate of input price inflation.

The largest upward contribution to the annual rate in May 2018 came from crude oil, which contributed 5.84 percentage points (Figure 4) and had annual price growth of 40.2% (Table 5), up from 20.1% last month. The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas prices, which rose 39.3% on the year. In May 2018, world Brent prices rose to an average of US $73 per barrel, the highest since November 2014 (source: World Bank). A detailed analysis of Brent crude oil prices and their relationship with PPI is included in the Prices economic commentary for May 2018.

Imported metals and inputs of fuels provided the second- and third-largest contributions to the annual rate, with 0.91 and 0.78 percentage points respectively. Prices for imported metals rose 11.5% on the year, while fuel prices rose 7.3%.

Crude oil prices were also the main driver to the increase in the monthly input inflation rate, with an upward contribution of 1.81 percentage points and a price growth of 10.4%, which is the highest since December 2016.

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 3.6 percentage points increase in the annual rate for inputs between April 2018 and May 2018, with five product groups displaying upward contributions to the change in the rate. Crude oil provided the largest upward contribution of 2.80 percentage points. Imported metals, and other imported parts and equipment provided the second- and third-largest upward contributions to the change in rate, at 0.46 and 0.39 percentage points respectively. Other imported materials and imported chemicals provided smaller upward contributions.

Four industries provided a negative contribution to the change in the rate, with fuel displaying the largest downward contribution of 0.22 percentage points.

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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.

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