1. Main points

  • The headline rate of inflation for goods leaving the factory gate (output prices) rose 3.3% on the year to September 2017, from 3.4% in August 2017.
  • Prices for materials and fuels (input prices) rose 8.4% on the year to September 2017, which is unchanged from August 2017.
  • Upward contributions from energy were offset by downward contributions from other industries, resulting in little change in the annual rates for both input and output prices.
  • Core output inflation was 2.5% on the year to September 2017, which is unchanged since July 2017.
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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.

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 VAT. 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 Standard Industrial Classification code appropriate to the index and a 4-character alpha-numeric code, which can be used to find series when using the time series dataset for PPI.

Every five years, producer price indices are rebased and weights updated to reflect industry changes.

Figures for the latest two months are provisional and the latest five months are subject to revisions in light of (a) late and revised respondent data and (b) for the seasonally adjusted series, revisions to seasonal adjustment factors are re-estimated every month. 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. Upward contributions from energy, offset by downward contributions led by food, resulted in no change to the annual rate of inflation for inputs of materials and fuels

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) was unchanged at 8.4% in September 2017, which is 11.5 percentage points below a recent peak of 19.9% in January 2017.

The 1-month rate for materials and fuels rose 0.4% in September 2017, which is a 1.9 percentage points fall from 2.3% in August 2017.

The index reached 108.6 in September 2017, which is its highest level since July 2014 when it stood at 109.5, although still below its historic peak of 120.9 in March 2013. This suggests the UK manufacturing sector is currently bearing roughly the same overall cost for materials and fuels that it did back in July 2014, but 10% less than it did in March 2013.

The annual rate of inflation for imported materials and fuels was 7.9% in September 2017 (Table 2), which is unchanged from August 2017. Imported materials and fuels represent roughly two-thirds of overall materials and fuels (input prices) in terms of index weight.

Apart from a slight dip in August 2017, the sterling effective exchange rate index (ERI) has remained steady at around 77.0 since June 2017. On the year, the ERI was down 1.9% in September 2017, although the index remains 9.1% down from June 2016 prior to the EU referendum.

Table 3 shows monthly and annual growth rates for input prices by industry and Figure 2 shows contributions by those industries to the monthly and annual rate of input price inflation.

The largest upward contribution to the annual rate in September 2017 came from crude oil, which contributed 2.33 percentage points (Figure 2) on the back of annual price growth of 16.6% (Table 3); this is only the second rise in the annual rate for crude oil since February 2017. The upward contribution from crude oil was driven mainly by an annual increase of 15.9% for prices of imported crude petroleum and natural gas.

Home food materials and imported metals provided the second and third largest contributions to the annual rate, with 1.54 and 1.41 percentage points respectively. Prices for home food materials rose 11.0% on the year, while prices for imported metals rose 18.6%.

Crude oil also provided the largest upward contribution to the monthly rate at 0.63 percentage points, which was driven by price growth of 4.7% between August and September 2017.

Figure 3 shows contributions to the change in the annual rate of inflation for fuels and materials purchased by manufacturers (input prices). There was no change overall to the annual rate between August and September 2017 (Table 1).

Energy prices provided the largest upward contribution to the rate; crude oil had an upward contribution at 0.27 percentage points followed by fuel at 0.24 percentage points. These upward contributions were offset by downward contributions from six industries led by home food materials, which provided a downward contribution of 0.26 percentage points.

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5. Downward contributions from food products, clothing, textile and leather products offset gains from petroleum products resulting in the output annual rate falling slightly

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.1 percentage points to 3.3% in September 2017.

The 1-month rate was 0.2% in September 2017 following 0.4% growth in August 2017. The 1-month rate has showed positive growth for all but one month over the past 12 months; in June 2017 the rate was flat.

Table 5 shows monthly and annual growth rates for output prices by industry and Figure 4 shows contributions by those industries to the monthly and annual rate of inflation at the factory gate.

Food products provided the largest upward contribution to the annual rate of 0.83 percentage points (Figure 4) driven by price growth of 5.5% on the year to September 2017 (Table 5). Growth was driven mostly by prices for dairy products, which rose 19.8% on the year. For further analyses on food prices please refer to section 6 of the May release and section 4 of the January release.

Petroleum products, and computer, electrical and optical products showed the second and third largest upward contributions to the annual rate, with 0.56 and 0.36 percentage points respectively. Petroleum prices increased 8.1% on the year, while prices for computer, electrical and optical products grew by 3.1%.

Petroleum products provided the largest upward contribution to the monthly rate at 0.17 percentage points.

Figure 5 shows contributions to the change in the annual rate for factory gate prices (output prices).

The 0.1 percentage points fall in the rate between August and September 2017 was mainly a result of downward contributions from five industries offsetting an upward contribution of 0.12 percentage points from petroleum products. The largest downward contribution of 0.08 percentage points came from food products.

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6. The core output Producer Prices Index inflation rate has remained unchanged at 2.5% since July 2017

Figure 6 shows the annual rate of inflation for the headline output Producer Price Index (PPI), core output PPI that excludes food, beverages, tobacco and petroleum (FBTP) industries and FBTP output PPI that includes FBTP industries.

We have discussed core inflation and FBTP industries in recent releases, so we will focus only on the latest data in this release. To access more information about core inflation, including longer-term trends, please visit section 6 of June’s PPI statistical bulletin and section 6 of the August PPI statistical bulletin.

The two single largest contributions (by industry) to headline PPI in September 2017 came from food and petroleum products, contributing a combined 1.39 percentage points to the headline annual rate (Figure 4), which stood at 3.3% in September 2017 (Table 4). Tobacco and alcohol provided a further upward contribution of 0.25 percentage points to the rate (Figure 4), which means FBTP industries contributed a combined 1.64 percentage points to the output PPI headline growth rate.

The 1.64 percentage points contribution from FBTP industries represented half of the annual growth reported for output PPI in September 2017. So while FBTP industries represent only 31% of output PPI in terms of index weight, they often account for a much larger share of headline growth. Price movements tend to be more extreme for FBTP industries over time versus those for industries included in core inflation, which is why inflation from these industries often dictates movements in the headline rate.

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8. Quality and methodology

The 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 Producer Price Index (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 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 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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