Services producer price inflation, UK: April to June 2016

Quarterly estimates of price changes for services provided by UK businesses to other UK businesses and government, for a limited range of service industries.

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Contact:
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Release date:
24 August 2016

Next release:
23 November 2016

1. Main points

The price of services sold by UK companies, as estimated by the Services Producer Price Index (SPPI), increased 1.2% in the year to Quarter 2 of 2016, compared with an increase of 1.3% in the year to Quarter 1 of 2016.

Between Quarters 1 and 2 of 2016, SPPI rose by 0.3%, compared with an increase of 0.5% between Quarter 4 of 2015 and Quarter 1 of 2016.

Professional, scientific and technical activities showed the largest upward contribution to the annual and quarterly rate. Prices increased by 1.9% in the year to Quarter 2 of 2016 and 0.4% between Quarters 1 and 2 of 2016.

Water supply, sewerage and waste management services showed the largest downward contribution to the SPPI, decreasing by 3.7% in the year to Quarter 2 of 2016.

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2. What is Services Producer Price Inflation?

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 1 and 2 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 indices' 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, rose steadily from an annual rate of 2.4% in Quarter 1 of 2006 to a peak of 3.7% during Quarters 1 and 2 of 2008. At the end of 2008, the rate of inflation fell rapidly, from annual inflation of 3.6% in Quarter 3 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. Since mid-2010, inflation has tended to remain relatively steady at around 1%. In Quarter 2 of 2016, prices increased by 1.2%.

Looking at the latest estimates (Table A) of the index for Quarter 2 of 2016, the main movements were:

  • prices received by UK service providers increased 1.2% in the year to Quarter 2 of 2016, down from an increase of 1.3% in Quarter 1 of 2016
  • the main upward contributions to the annual rate came from increases in the prices charged for professional, scientific and technical activities, information and communication, and real estate activities
  • service prices rose 0.3% between Quarters 1 and 2 of 2016, compared with an increase of 0.5% between Quarter 4 of 2015 and Quarter 1 of 2016
  • the main upward contributions to the quarterly rate of inflation came from professional, scientific and technical activities, and information and communication

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4. Annual inflation

The Services Producer Price Index rose by 1.2% in the year to Quarter 2 of 2016, down from an increase of 1.3% in the year to Quarter 1 of 2016. Of the 10 sections (as defined by the 2007 Standard Industrial Classification) that are combined to form the SPPI, 7 showed price increases.

The main upward contributions to the annual rate of the SPPI came from professional, scientific and technical activities and information and communication. These increased 1.9% and 1.6% respectively, in the year to Quarter 2 of 2016, compared to increases of 1.8% and 1.5% in the year to Quarter 1 of 2016. Real estate activities also had a notable contribution to the increase of the index in the year to Quarter 2 of 2016, increasing by 3.6%.

There was a notable decrease in water supply, sewerage and waste management services where prices fell by 3.7% in the year to Quarter 2 of 2016, compared with a decrease of 6.0% in the year to Quarter 1 of 2016 (Table B and Figure B).

Price increases for professional, scientific and technical activities, information and communication, and real estate activities, provided the main contributions to the rise in the SPPI in the year to Quarter 2 of 2016.

Professional, scientific and technical activities prices increased by 1.9% in the year to Quarter 2 of 2016. Prices rose in all indices within this section, but the largest contributions to the rise were seen in business management and consultancy and advertising services. Business management and consultancy prices increased by 3.0% in the year to Quarter 2 of 2016, compared with an increase of 2.8% in the year to Quarter 1 of 2016. This rise is mainly a result of companies increasing their charges for providing human resource consultancy services. Advertising services increased 2.7% in the year to Quarter 2 of 2016, compared with an increase of 0.9% in the year to Quarter 1 of 2016. This increase is due to a rise in the price of media buying services and advertising creation.

Information and communication prices increased 1.6% in the year to Quarter 2 of 2016. Increases in the prices of computer software and book publishing services contributed towards this increase, with prices increasing 1.5% and 3.4% respectively in the year to Quarter 2 of 2016. The increase in computer software prices was due to a rise in the prices for maintenance and support of software systems and applications.

Real estate activities continued to show increases in the year to Quarter 2 of 2016, with prices rising by 3.6%. Real estate agency and property rental prices have both contributed to the increase. Real estate agency prices increased 5.9% in the year to Quarter 2 of 2016, compared with an increase of 10.3% in the year to Quarter 1 of 2016. Property rental prices increased 2.3% in the year to Quarter 2 of 2016, compared with an increase of 1.9% in the year to Quarter 1 of 2016.

Water supply, sewerage and waste management services showed the largest downward contribution within the SPPI. Prices fell 3.7% in the year to Quarter 2 of 2016, compared with a fall of 6.0% in the year to Quarter 1 of 2016, which is the smallest decrease seen in this index since Quarter 4 of 2014. This decrease was largely a result of the fall in prices for sorted recovered materials services, where prices fell 15.5% in the year to Quarter 2 of 2016, up from a decrease of 27.8% in the year to Quarter 1of 2016 (Figure C).

The SPPI increased 1.2% in the year to Quarter 2 of 2016, compared with an increase of 1.3% in the year to Quarter 1 of 2016. Figure D shows how the SPPI sections have contributed towards this 0.1 percentage point change. Decreases in the prices for accommodation and food, real estate activities, and administrative and support services were offset by increases in the prices for water supply, sewerage and waste management, information and communication, professional, scientific and technical services, and transportation and storage.

Examining inflation for each of the sections that contribute to the SPPI reveals a diverse set of trends. Figure E shows both the range of annual inflation rates experienced by each of the sections since Quarter 2 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. Vehicle repair and maintenance has not experienced inflation lower than 1.6% at any point in the past 5 years, while administrative and support services have not experienced inflation higher than 1.4%.

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5. Quarterly inflation

Prices received for the services included in the Services Producer Price Index rose 0.3% between Quarter 1 and Quarter 2 of 2016, compared with an increase of 0.5% between Quarter 4 of 2015 and Quarter 1 of 2016. Of the 10 sections that make up the SPPI, 9 showed increases in prices between Quarter 1 and 2 of 2016.

The largest increase in the quarterly rate came from water supply, sewerage and waste management, which increased by 2.9% between Quarters 1 and 2 of 2016 (Table C and Figure F).

Professional, scientific and technical activities showed the largest contribution to the SPPI rate between Quarters 1 and 2 of 2016, with prices rising by 0.4%, compared with an increase of 1.1% between Quarter 4 of 2015 and Quarter 1 of 2016. The main contributions to this increase were from advertising prices, and engineering services which increased by 1.9% and 1.0%, respectively, between Quarters 1 and 2 of 2016. The movement in advertising prices was driven by media planning and buying. The increase in engineering services prices was driven by civil, structural and other engineering services.

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6. Economic context

Comparison with average weekly earnings

The Services Producer Price Index (SPPI) captures changes in the prices received by UK business for the provision of a selection of services to other UK businesses and the public sector. 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 the wage structure of the workforce can have an important impact on the SPPI. It is expected that the price charged for services should move in a similar way to the wages received by the UK workforce. Figure G shows the annual percentage change of the fees received by UK businesses for the provision of services, as estimated by the SPPI, with an indicator of salaries received by the UK workforce who are employed in the service sector, as estimated by the average weekly earnings (AWE) “services” pay index (excluding bonuses).

Figure G shows the growth rates of both wages and services prices slowed considerably during 2008 and 2009, with services inflation falling from an average of 3.5% in 2008 to minus 0.8% in 2009, while growth in services wages slowed from 3.9% to 1.8% on average during the same period. Following the downturn, services prices and wages have followed similar trends, diverging slightly during 2015, as wages grew faster than services prices from the end of 2014. Looking at the most recent data, earnings have continued to grow faster than services producer prices, with services wages growing by 1.9% in Quarter 2 of 2016, compared to services prices, which had grown by 1.2% over the same period.

Although labour cost is a significant factor determining services output prices, competitive pressures will also have some bearing on services prices. As wage growth has picked up during 2014 and 2015, on-going competitive pressures in the services market may have limited the extent to which businesses can pass on those increasing labour costs.

The rise in service sector wage growth reflects some wider tightening in the UK labour market. Following strong employment growth over the past 2 years, the unemployment rate among those aged 16 and above fell to 4.9% in the 3 months to June 2016, below the pre-downturn (2000 to 2007) average of 5.1%. The employment rate rose further to 74.5% in the 3 months to June 2016 for those aged between 16 and 64, which is the highest rate since comparable records began.

In parallel with the fall in the unemployment rate, labour demand (as measured by the number of vacancies) has been relatively strong. The number of unemployed people per vacancy has fallen quite considerably since 2011, from 5.8 in the 3 months to December 2011 to 2.2 in the 3 months to June 2016, indicating that there are fewer unemployed workers for each vacancy. In relation to the services industry, the number of vacancies has been rising since mid-2012 and increased by 2.9% in the 3 months to June 2016, compared with a year earlier.

While the tightening labour market may be exerting upward pressure on wages, the productivity of labour also influences wage growth. Improvements in productivity creates capacity for output to rise faster than the corresponding rise in inputs, thereby allowing firms to produce more output per unit of labour employed. Productivity growth allows for output prices to rise more gradually, all else being equal. Unit labour costs in the services sector – which measures the labour cost per unit of output produced – increased by 0.1% in Quarter 1 of 2016 compared with the previous quarter. This was slightly higher than the quarterly growth in unit labour cost in Quarter 4 of 2015, which contracted by 0.2%. This could indicate labour costs exerting upward pressure on services prices.

While there are a number of factors affecting services prices, the demand for goods and services in the UK economy could also have an impact on services prices. The latest estimate has shown GDP increasing by 0.6% in Quarter 2 of 2016, compared with 0.4% in the previous quarter. Much of this growth has been concentrated in the services industry, with services output increasing by 0.5%, only slightly slower than growth in the previous quarter, which was 0.6%.

Comparison with Consumer Price Index

While the SPPI measures the amount received by a company for services they’ve provided to other businesses, the prices paid by households is estimated by the Consumer Price 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 H shows a comparison with the “all services” sector of the Consumer Prices Index (CPI) which measures the prices paid for services by households.

Generally inflation in the CPI “all services” index runs at a higher rate than the SPPI. Between late 2005 and 2008 the gap between the SPPI and CPI annual rate of inflation narrowed before widening again from 2009 to present. During the economic downturn in 2008 to 2009, the annual rate of inflation for both indices decreased, with prices falling by as much as 1.6% for services sold by UK businesses, while the prices paid by households continued to grow, although at a much lower rate, reaching a low of 2.3% in Quarter 4 of 2009. Since Quarter 4 of 2010 both indices have shown growth; however, the SPPI has shown significantly lower growth than CPI.

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 J shows the growth rates of service producer prices for a selection of EU countries from Quarter 1 of 2011 to Quarter 1 of 2016; this is the latest comparable data available for most of the countries represented.

The UK and Sweden recorded largely stable service producer price indices, growing by 1.5% and 1.0% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France and Spain. France experienced negative SPPI inflation until Quarter 2 of 2015 and Spain experienced negative SPPI inflation until Quarter 1 of 2015 and again in Quarter 1 of 2016.

France and Spain experienced the lowest average inflation rates across the period between Quarter 1 2011 and Quarter 1 2016, with both countries witnessing falling prices for extended periods. More recently, France witnessed a rise in prices between Quarter 3 (July to Sept) 2015 and Quarter 1 2016 and Spain between Quarters 2 and 4 of 2015, although Spain then saw prices fall again in Quarter 1 2016. Austria experienced the highest average inflation rate across the period, ranging from a high of 2.6% in Quarter 4 of 2011and 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 2 of 2016, movements in the net sector SPPI were:

  • annual inflation rose 1.2%, unchanged from the year to Quarter 1 of 2016
  • between Quarters 1 and 2 of 2016, quarterly inflation stood at 0.3%, compared with 0.5% between Quarter 4 of 2015 and Quarter 1 of 2016

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

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8 .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.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. Coverage of SPPI

    The SPPI is a measure of inflation for the UK service sector; however, prices are not collected from Northern Ireland for any of the service 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 final SPPI assessment report is now available.

    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.

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

    As previously announced, we have been taking forward the rebasing of PPI and SPPI onto a 2010=100 basis. SPPI has been published on a 2010=100 basis, which was first released on 26 February 2014. A parallel run has been conducted to compare 2010=100 index values with 2005=100, analysing trends in the process. This parallel run will form 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.

  6. Quality and methods

    A Quality and Methodology Information (QMI) paper is available for the SPPI that describes how the statistics presented in this statistical bulletin are produced and provides information on the quality of the statistics. Detailed information on the methods used to compile the SPPI is available in the SPPI manual.

  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 is used as a proxy. In order to make the Annual Business Survey (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.

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Contact details for this Statistical bulletin

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