1. Main points

  • The price of services sold by UK companies, as estimated by the Services Producer Price Index (SPPI), increased 1.4% in the year to Quarter 4 (Oct to Dec) of 2016, compared with an increase of 1.6% in the year to Quarter 3 (July to Sept) of 2016.

  • Between Quarters 3 and 4 of 2016, SPPI rose by 0.2%, unchanged from last quarter.

  • Information and communication activities showed the largest upward contribution to the annual rate; prices increased by 2.5% in the year to Quarter 4 of 2016.

  • Administrative and support services showed the only downward contribution to the annual rate, decreasing by 0.5% in the year to Quarter 4 of 2016.

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2. Things you need to know about this release

The Services Producer Price Indices (SPPI) provides a measure of inflation for the UK service sector. It is constructed from a statutory quarterly survey, which measures changes in the price received for selected services provided by UK businesses to other UK businesses and government. Individual SPPIs are available, which provide information on price change for a selection of service industries. These individual price indices are also aggregated together to create a service industry SPPI with limited coverage (it does not provide full coverage of the “service sector”).

The primary use of the SPPI is as a deflator in the UK National Accounts. However, it is also important as an inflationary measure to inform monetary policy and to account for inflation in long-term service procurement contracts. For more information on the use made of SPPI please see the separate document Users of Services Producer Price Index data.

The figures presented in this statistical bulletin are considered provisional for the latest 2 quarters (Quarters 3 and 4 of 2016) and may be revised as late data is received.

None of the indices presented in this bulletin are seasonally adjusted.

Coverage of SPPI

The service sector is estimated to account for around 78% of the UK economy based on its weight in gross domestic product (GDP). We do not produce an index for every industry in the service sector and so the SPPI is a partial, best estimate, of the overall inflation to UK businesses in the service sector. The SPPIs presented in this statistical bulletin are estimated to represent 59% of the total service sector at industry level. The SPPI's coverage of the service sector at standard industrial classification (SIC) class, division and section level is available in the SPPI coverage document. As resources allow, we will continue to review the existing indices and expand coverage through developing indices for new industries. As such, the SPPI will change composition from time to time but will always remain our best estimate of inflation in the UK service sector. The fact that coverage may change over time should be considered when deciding which indices best meet your needs.

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3. Summary

Between early-2006 and mid-2008, the annual rate of inflation in the service sector, as estimated by the Services Producer Price Index (SPPI), rose steadily from an annual rate of 2.4% in Quarter 1 (Jan to Mar) of 2006 to a peak of 3.7% during Quarters 1 and 2 (Apr to June) of 2008. At the end of 2008, the rate of inflation fell rapidly, from annual inflation of 3.6% in Quarter 3 (July to Sept) of 2008 to deflation (prices lower than they were in the same quarter of the previous year) of 1.6% in Quarter 3 of 2009.

The annual rate of inflation began to move in an upward direction at the end of 2009, reaching a post-economic downturn high of 1.8% in Quarter 2 of 2010. In the year to Quarter 4 of 2016, prices increased by 1.4% (Figure 1).

Looking at the latest estimates (Table 1) of the SPPI for Quarter 4 of 2016, the main movements were:

  • prices received by UK service providers increased 1.4% in the year to Quarter 4 of 2016, down from an increase of 1.6% in the year to Quarter 3 of 2016
  • the main upward contributions to the annual rate came from increases in the prices charged for information and communication, and professional, scientific and technical activities
  • services prices rose 0.2% between Quarters 3 and 4 of 2016, unchanged from the last quarter
  • the main upward contributions to the quarterly rate of inflation came from transportation and storage, professional, scientific and technical activities, and repair and maintenance of motor vehicles

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4. Annual inflation

The Services Producer Price Index (SPPI) rose by 1.4% in the year to Quarter 4 (Oct to Dec) of 2016, down from an increase of 1.6% in the year to Quarter 3 (Jul to Sep) of 2016. Of the 10 sections (as defined by the 2007 Standard Industrial Classification) that are combined to form the SPPI, 9 showed price increases.

The main upward contributions to the annual rate of the SPPI came from information and communication, and professional, scientific and technical activities. These increased 2.5% and 1.5% respectively, in the year to Quarter 4 of 2016, compared with increases of 2.7% and 1.9% respectively in the year to Quarter 3 of 2016. Transportation and storage activities also had a notable contribution to the increase of the index in the year to Quarter 4 of 2016, increasing by 1.1%, unchanged from last quarter.

The only section to show a decrease was administrative and support services where prices fell by 0.5% in the year to Quarter 4 of 2016, compared with an increase of 0.7% in the year to Quarter 3 of 2016 (Table 2 and Figure 2).

Information and communication activities prices increased by 2.5% in the year to Quarter 4 of 2016. Prices rose in all indices within this section, but the largest contributions to the rise were seen in computer software and business telecoms. Computer software services increased 1.7% in the year to Quarter 4 of 2016, compared with an increase of 1.9% in the year to Quarter 3 of 2016. The increase was driven by an increase in the prices of facilities management, outsourcing and data processing. Business telecoms prices increased by 3.9% in the year to Quarter 4 of 2016, compared with an increase of 4.0% in the year to Quarter 3 of 2016.

Professional, scientific and technical activities prices increased 1.5% in the year to Quarter 4 of 2016. Increases in the prices of business and management consultancy services, accountancy services and legal services contributed towards this increase, with prices increasing 2.1%, 1.8% and 2.3% respectively in the year to Quarter 4 of 2016. The increase in the price for business and management consultancy services was due to a rise in the prices of human resources consultancy, the increase in accountancy services was due to a rise in the prices for tax consultancy and the increase for legal services resulted from price rises in legal advisory and representation for business and commercial law.

The prices for transportation and storage activities increased 1.1% in the year to Quarter 4 of 2016, unchanged from Quarter 3 of 2016. Business airfares and freight forwarding provided the biggest contributions to the increase. Business airfares increased 4.9% in the year to Quarter 4 of 2016, compared with an increase of 3.9% in the year to Quarter 3 of 2016. Freight forwarding prices increased 1.6% in the year to Quarter 4 of 2016, compared with an increase of 0.4% in the year to Quarter 3 of 2016.

Administrative and support services showed the only downward contribution within the SPPI. Prices fell 0.5% in the year to Quarter 4 of 2016, compared with a rise of 0.7% in the year to Quarter 3 of 2016. This decrease was largely a result of the fall in prices for recruitment and personnel services where prices fell 0.9% in the year to Quarter 4 of 2016, compared with a rise of 0.5% in the year to Quarter 3 of 2016.

The SPPI increased 1.4% in the year to Quarter 4 of 2016, compared with an increase of 1.6% in the year to Quarter 3 of 2016. Figure 3 shows how the SPPI sections have contributed towards this 0.2 percentage points change.

Increases in the prices of water supply, sewerage and waste, vehicle repair and maintenance, and transportation and storage were offset by decreases in the prices of administrative and support services, professional, scientific and technical services, and real estate activities.

Examining inflation for each of the sections that contribute to the SPPI reveals a diverse set of trends. Figure 4 shows both the range of annual inflation rates experienced by each of the sections since Quarter 4 of 2012 and the annual rates of inflation for the 2 most recent quarters.

One notable difference between each section is the range of inflation rates that have been experienced since 2012. Water supply, sewerage and waste management services, accommodation and food, and real estate activities have experienced a relatively wide range of inflation rates over this period. Although all sections have experienced some variance in inflation, certain industries have experienced inflation consistently higher than others. Wholesale and retail trade, vehicle repair and maintenance has not experienced inflation lower than 1.5% at any point in the past 5 years, while transportation and storage services has not experienced inflation higher than 1.8%.

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5. Quarterly inflation

Prices received for the services included in the Services Producer Price Index (SPPI) rose 0.2% between Quarters 3 (July to Sept) and 4 (Oct to Dec) of 2016, unchanged from the last quarter. Of the 10 sections that make up the SPPI, only 5 showed increases in prices between Quarter 3 and 4 of 2016.

The largest increase in the quarterly rate came from water supply, sewerage and waste management, which increased by 1.4% between Quarters 3 and 4 of 2016. The remaining increases were small, ranging from 0.2% to 0.8% (Table 3).

The largest decreases in the quarterly rate came from accommodation and food, and other personal services, both falling 0.4% between Quarter 3 and Quarter 4 of 2016.

Transportation and storage services showed the largest contribution to the SPPI rate between Quarters 3 and 4 of 2016, with prices rising by 0.3%, compared with an increase of 0.5% between Quarters 2 and 3 of 2016. The main contributions to this increase were from business airfare prices, which increased 1.4% between Quarters 3 and 4 of 2016.

Professional, scientific and technical activities had the second largest contribution to the quarterly rate, increasing by 0.2% between Quarter 3 and Quarter 4 of 2016. The movement was driven by changes in the prices of business and management consultancy, and advertising services, which increased by 1.0% and 1.2% respectively.

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6. Economic context

Comparison with Consumer Prices Index

While the Services Producer Price Index (SPPI) measures the amount of money received by a company for services they’ve provided to other businesses and government, the prices paid by households is estimated by the Consumer Prices Index (CPI). While the costs associated with providing services to both businesses and households will be broadly similar, there may be different costs associated with providing services to different customers. Figure 6 shows a comparison with the “all services” sector of the CPI, which measures the prices paid for services by households.

Figure 6 shows that generally inflation in the CPI “all services” index runs at a higher rate than the SPPI. During the economic downturn in 2008 to 2009, the annual rates of inflation for both indices decreased and then recovered in 2010. The SPPI annual growth rate, however, did not return to pre-downturn rates, but remained relatively subdued at an average annual growth of 1.1% between 2010 and 2016. This is broadly in line with growth rates seen in 2004 to 2005. In the latest period, Quarter 4 (Oct to Dec) 2016, the SPPI annual growth was slightly above this long-term trend at 1.4%.

In contrast, the all services CPI annual growth rate rose to pre-downturn levels by early 2011, but has since declined to 2.3% in Quarter 4 2016 and has been broadly flat since Quarter 4 2014. In both series, the most recent movement in the 12-month growth rate in prices has been downwards. This is in contrast to the headline CPI 12-month growth rate, which increased between Quarter 3 (July to Sept) and Quarter 4 from 0.7% to 1.2%.

For many services, the cost of labour is the largest component of the price charged by businesses for providing the service, rather than the cost of goods or fuels. As a result, a change in average wages of the workforce in the service sector can have an important impact on the SPPI. Previous analysis has shown that the price charged for services moves in a similar way to the service sector regular pay.

This may explain why the growth in the SPPI has generally been lower in the post-downturn period than in the pre-downturn period. Both average weekly earnings for those working in services and SPPI growth rates have been much lower since the economic downturn. The annual average growth rate for regular pay in the service sector was 4.1% between 2004 and 2007 but only 1.7% between 2010 and 2016.

Other measures of service sector inflation

There are other measures of service sector inflation available such as the Chartered Institute of Procurement and Supply (CIPS) Purchasing Managers’ Index and the Confederation of British Industry (CBI) Service Sector Survey. There are significant methodological differences between these surveys and SPPI; therefore, direct comparisons cannot be made.

International comparison

All countries within the European Union are required to produce a measure of producer price inflation for the services sector under the Short Term Statistics Regulation. Figure 7 shows the growth rates of services producer prices for a selection of EU countries from Quarter 3 (July to Sept) of 2011 to Quarter 3 of 2016; this is the latest comparable data available for most of the countries represented.

The UK recorded largely stable SPPIs, growing by 2.2% in Quarter 3 of 2016. This contrasts with France and Spain. France experienced negative SPPI inflation from Quarter 1 (Jan to Mar) of 2013 until Quarter 2 (Apr to June) of 2015 and has seen rises until Quarter 3 of 2016 where it has seen no change. Spain experienced negative SPPI inflation until Quarter 1 of 2015 and again since Quarter 1 of 2016. Austria has seen an increase of 1.4%, which is unchanged from Quarter 2 of 2016. Sweden has seen a fall of 0.2%, which is the first fall since Quarter 2 of 2014 and only the second fall since Quarter 3 of 2011.

France and Spain experienced the lowest average inflation rates at points across the period between Quarter 3 2011 and Quarter 3 2016, with both countries witnessing falling prices for extended periods. More recently, France witnessed a rise in prices between Quarter 3 2015 and Quarter 2 2016 and Spain between Quarters 2 and 4 of 2015, although Spain then saw prices fall again in Quarter 1 2016 and continue to fall. Austria experienced the highest average inflation rate across the period, ranging from a high of 2.6% in Quarter 4 of 2011 to a low of 0.9% in Quarter 3 of 2015.

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7. Net sector

At the aggregate level, both a net and gross sector Services Producer Price Index (SPPI) is produced. The prices used to construct both of these indices are the same, but different weights are used to construct the net sector index compared with the gross sector.

Summary of net sector movements

In Quarter 4 (Oct to Dec) of 2016, movements in the net sector SPPI were:

  • annual inflation rose 1.3%, compared with a rise of 1.6% in the year to Quarter 3 (July to Sept) of 2016
  • between Quarters 3 and 4 of 2016, quarterly inflation stood at 0.2%, unchanged since between Quarters 2 (Apr to June) and 3 of 2016

Generally, the movements of the net sector SPPI are similar to those of the gross sector indices (Figure 8).

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8. Quality and methodology

The SPPI Quality and Methodology Information document contains important information on:

  • the strengths and limitations of the data and how it compares with related data
  • users and uses of the data
  • how the output was created
  • the quality of the output including the accuracy of the data

Detailed information on the methods used to compile the SPPI is available in the SPPI manual.

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9 .Background notes

  1. How are we doing?

    We are seeking to improve this release and welcome your feedback to help us achieve this. If you have any comments on the format, layout or content of this release please let us know. We are also interested to know how you use these data to inform your work. Please email us: sppi@ons.gsi.gov.uk.

  2. Analysis of Service Producer Price Indices using standard errors

    To help you quantify the uncertainty around the estimates of service sector inflation, we have calculated standard errors for SPPI. An SPPI standard errors article presenting the results of our analysis is available on our website.

  3. Geographical coverage of SPPI

    The SPPI is a measure of inflation for the UK services sector; however, prices are not collected from Northern Ireland for any of the services industries that are collected as part of the quarterly survey. This is because the Statistics of Trade Act which makes the SPPI survey mandatory does not extend to Northern Ireland. The omission of prices from Northern Ireland means that the SPPI makes the assumption that prices received by companies in Northern Ireland change at the same rate as prices in the rest of the UK.

  4. Re-assessment by the UK Statistics Authority

    In 2013 the SPPI underwent a routine re-assessment by the UK Statistics Authority against the Code of Practice for Official Statistics. The SPPI assessment report was published in October 2014. Following the re-assessment of service producer price indices it has been confirmed as a National Statistic - Assessment of Services Producer Price Indices.

  5. Finding SPPI data

    All of the data included in this statistical bulletin, alongside data for the full range of SPPIs, is available in the associated Services Producer Price Index (SPPI) dataset or can be downloaded from the time series dataset for SPPI. Each SPPI has 2 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 SPPI. SPPI records which show higher, lower or “equal to” movements are also available to view or download.

  6. Article about rebasing the PPI and SPPI onto 2010=100

    A parallel run was conducted to compare 2010=100 index values with 2005=100, analysing trends in the process. This parallel run formed an assessment of the impact of rebasing. An article services producer price index rebasing (2010=100) describing the results of this assessment is available on our website. If you have any questions or queries regarding the impact of rebasing on SPPI data, please contact SPPI.

  7. Guidance for users

    The SPPI is calculated on a “business to business” basis. This means that only transactions between UK businesses and other UK businesses or government are included. Sales made to customers outside of the UK or to members of the public are excluded.

    Index numbers shown in this statistical bulletin are on a gross sector basis unless otherwise stated. This means that they include transactions between UK service sector businesses and all other UK businesses and government.

    Indices relate to average prices per quarter. The full effect of a price change occurring within a quarter will only be reflected in the index for the following quarter. All index numbers exclude VAT and are not seasonally adjusted. Since SPPIs exclude VAT, they are not affected by the increase in the standard rate of VAT to 20% from 4 January 2011.

  8. Definitions

    Gross and net sector series

    All figures presented in this statistical bulletin are calculated on a gross sector basis unless otherwise stated.

    Gross sector output (GSO) series

    This is calculated using weights based on sales to UK businesses and government from all transactions within the UK. This index reflects the “service sector” inflation experienced by all UK businesses.

    Net sector output (NSO) series

    This is calculated using weights based on sales to UK businesses and government outside of the service sector. For example, sales of legal services to a UK manufacturing company would be included, but sales to an accountancy company (another service provider) would be excluded. This index gives a measure of inflation that is specific to non-service sector businesses.

    GSO weights

    For most industries, sales from the Services Turnover Survey (STS) are used to determine their weight into the SPPI. Where STS data is unavailable, data from the Annual Business Survey (ABS) is used as a proxy. In order to make the ABS data more comparable to the STS data, an adjustment factor is applied to remove sales attributed to non-service provision. These sales values are then used to calculate the industry weights.

    NSO weights

    Net sector weights are calculated by taking the gross sector sales data and adjusting them to represent only sales to businesses outside the service sector. This adjustment is made using data from the national accounts supply and use tables. These tables allow for the calculation of a ratio for each industry that approximates the proportion of sales to non-service sector businesses. This ratio is applied to the gross sector sales to give an approximation of the net sector sales. The resulting calculated sales are then used to weight the industries into the net sector SPPI.

    Reporting periods

    Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September and Quarter 4 refers to October to December.

  9. Data sources

    The SPPI is compiled using the results of a mandatory survey carried out under the Statistics of Trade Act (1947). To keep the burden on respondents to a minimum, alternative data sources are used to compile the indices wherever possible. Currently 6 indices are compiled using external data sources, these data sources are:

    • property rental payments – Investment Property Databank (IPD)
    • financial intermediation (banks) – Bank of England (BoE)
  10. SPPI coverage

    We do not produce indices for every industry in the service sector and so the SPPI is a partial, best estimate of the overall inflation to UK businesses from the service sector. Similarly, the indices published at section level do not provide full coverage and are the best estimate that can be made of those particular service activities using the data available. As resources allow, we will continue to review the existing indices and expand coverage through developing them for new industries. As such, the SPPI will change composition from time to time, but will always remain our best estimate of overall inflation to UK businesses from the service sector. The fact that coverage may change over time should be considered by users when deciding which indices best meet their needs.

  11. Revisions

    SPPI follows our policy for revisions and corrections and will show significant revisions but suppress minor changes to avoid unnecessary inconvenience to users. Indices for the most recent 2 quarters are regarded as provisional and may be revised as later data become available.

    For this statistical bulletin, Table 1R in the SPPI dataset highlights revisions to movements in price indices previously published in last quarter's statistical bulletin.

  12. European comparability

    The UK is required to produce a number of the indices included in this statistical bulletin under the short-term statistics regulation. As a result, all EU countries must publish equivalent series on a comparable basis. Further information about SPPI at an EU level, and access to data for all EU countries is available on the Eurostat website.

  13. Publication policy

    The complete run of data in the tables of this bulletin are also available to view and download in other electronic formats free of charge using our time series explorer (if you want the data associated with this bulletin click into Download data in this release option). You can download the complete release in a choice of zipped formats or view and download your own selections of individual series.

  14. National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference.

  15. Business prices enquiries

    Tel +44 (0) 1633 455723 or +44 (0) 1633 455901

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Contact details for this Statistical bulletin

James Wells
sppi@ons.gsi.gov.uk
Telephone: +44 (0)1633 455582