Producer price inflation, UK: September 2016

The price of goods bought and sold by UK manufacturers, as estimated by the Producer Price Index, rose again in the year to September 2016. This is the third consecutive increase following 2 years of falls and the largest increase since September 2013.

Factory gate prices (output prices) for goods produced by UK manufacturers rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016.

Core factory gate prices, which exclude the more volatile food, beverage, tobacco and petroleum products, rose 1.4% in the year to September 2016, unchanged from last month.

The overall price of materials and fuels bought by UK manufacturers for processing (total input prices) rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016.

Core input prices, which exclude purchases from the more volatile food, beverage, tobacco and petroleum industries, rose 4.9% in the year to September 2016, compared with a rise of 6.3% in the year to August 2016.

From January 2017 we are improving the way we publish economic statistics, with related data grouped together under new "theme" days. This will increase the coherence of our data releases and involve minor changes to the timing of certain publications. For more information see Changes to publication schedule for economic statistics.

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 factory gate price (the output price) is the price of goods sold by UK manufacturers. It includes costs such as labour, raw materials and energy, as well as interest on loans, site or building maintenance, or rent and excludes taxes.

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 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.

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 rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016. This is the third increase following 2 years of falling prices.

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. In 2016, both total and core output inflation have been showing similar upwards trends (Figure 1).

Looking at the latest estimates (Table 1), movements in factory gate prices over the 12 months to September 2016 were as follows:

• factory gate prices rose 1.2%, compared with a rise of 0.9% in the year to August 2016

• core factory gate prices rose 1.4%, unchanged from last month

• factory gate inflation excluding excise duty rose 1.2%, compared with a rise of 0.9% in the year to August 2016

Between August and September 2016:

• factory gate prices increased 0.2%, compared with an increase of 0.1% in August 2016

• core factory gate prices increased 0.1%, unchanged from last month

Table 2 shows the annual percentage change in price across all product groups and Figure 2 shows their contribution to the annual factory gate inflation rate.

Table 3 shows the monthly percentage change in price across all product groups and Figure 3 shows their contribution to the 1 month factory gate inflation rate.

Factory gate prices rose 1.2% in the year to September 2016, compared with a rise of 0.9% in the year to August 2016. This is the third annual increase since June 2014. The main contribution to the increase in the annual rate for September 2016 came from other manufactured products. An increase in the price of transport equipment, and tobacco and alcohol also contributed towards the rise in the output price of manufactured products. These increases were offset slightly by a decrease in the price of food products, the only index to show a decrease (Figure 2).

Other manufactured products rose 2.6% in the year to September 2016, compared with a rise of 2.8% in the year to August 2016. The majority of other manufactured products showed increases, however, the main contributions to this rise came from soft drinks, mineral water and other bottled waters, and other manufactured goods, with prices rising by 11.2% and 2.6% respectively in the year.

Transport equipment prices rose 2.7% in the year to September 2016, compared with a rise of 3.0% in the year to August 2016. This index has now seen increases on the year since January 2016. The main contributor to this increase was from motor vehicles, trailers and semi-trailers which increased 2.3% on the year to September 2016.

Tobacco and alcohol prices increased 2.2% in the year to September 2016, compared with an increase of 1.6% in the year to August 2016. This is the largest increase seen in this index since February 2015. This upward movement was driven by an increase of 5.9% in the prices of tobacco products; this is the largest increase seen in this index since February 2015.

The increases were offset slightly by food products, which decreased 1.1% in the year to September 2016, compared with a fall of 1.8% in the year to August 2016. Decreases in other food products, and dairy products were the largest contributors.

Petroleum products showed an increase of 1.6% in the year to September 2016, which is the first increase seen in this index since August 2013.

The monthly price index saw a rise of 0.2% between August and September 2016, compared with a rise of 0.1% between July and August 2016. Most product groups showed small monthly movements. Petroleum products and food products provided the largest upward contributions, and other manufactured products provided the only downward contribution to the monthly rate (Figure 3).

Petroleum products prices increased 1.1% between August and September 2016 compared with a decrease of 0.7% between July and August 2016. The main contributors to the increase came from avtur, motor spirit, and diesel and gas oil which increased 4.5%, 1.0% and 0.7% respectively.

Between August and September 2016, food product prices rose by 0.2%, compared with an increase of 0.3% between July and August 2016. Increases of 0.4% in the price for preserved meat and meat products, and 0.7% for prepared animal feeds contributed towards this upwards movement.

Other manufactured products was the only group to show a decrease, falling by 0.1% between August and September 2016 compared with an increase of 0.2% between July and August 2016. Falls of 0.1% and 0.2% in the prices of other non-metallic mineral products, and soft drinks, mineral water and other bottled waters contributed to 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 underlying factory gate inflation, rose 1.4% in the year to September 2016, unchanged from the year to August. This increase of 1.4% is the largest annual movement seen in core factory gate prices for more than 4 years. The largest contributors to this rise were other manufactured products and transport equipment.

The monthly core factory gate price index showed a rise of 0.1% between August and September 2016, unchanged from last month.

Output producer price index contribution to change in rate

The annual percentage rate for the output PPI in September 2016 increased 1.2%, compared with a rise of 0.9% the previous month resulting in an increase in the annual rate of 0.3 percentage points. Petroleum products was the main contributor to the change in the 12 month rate.

Figure 5 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 September 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 largest range of movements; ranging from a fall of 19.2% on the year in September 2015 to an increase of 1.6% in September 2016. Transport equipment shows the biggest increase, ranging from a fall of 0.7% on the year in November 2015 to a rise of 3.0% in August 2016.

Figure 5: Output PPI range of movements

UK, September 2015 to September 2016

Source: Office for National Statistics

Notes:

1. nec= not elsewhere classified

Download this image Figure 5: Output PPI range of movements

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Figure 6 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 September 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 July 2014, however, this gap has closed in recent months. Both series have shown increases in the year to September 2016. Currently there is a difference of 2.3 percentage points, compared with a maximum of 10.9 percentage points in January 2015.

The price of imported materials as a whole (including crude oil) rose 9.0%, compared with an increase of 9.6% in the year to August 2016; the fourth rise seen in this index since September 2013.

Looking at the latest data (Table 4), the main movements in the year to September 2016 were as follows:

• the total input price index rose 7.2%, compared with a rise of 7.8% in the year to August 2016

• the core input price index saw a rise of 4.9%, compared with a rise of 6.3% in the year to August 2016

Between August and September 2016:

• the total input price index showed no movement, compared with a rise of 0.2% between July and August

• the seasonally adjusted input price index for the manufacturing industry excluding the food, beverage, tobacco and petroleum industries (Table 4) fell 0.8%, compared with a rise of 0.1% between July and August

Table 5 and Figure 7 show the percentage change in the price of the main commodities groups over the year and their contributions to the total input index.

Table 6 and Figure 8 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, rose 7.2% in the year to September 2016, compared with a rise of 7.8% in the year to August 2016. The main upwards contributions to the index came from crude oil, home-produced food, and imported metals.

The monthly input index showed no movement between August and September 2016, compared with an increase of 0.2% between July and August 2016 (see Table 6 and Figure 8).

Crude oil rose 14.2% in the year to September 2016, compared with an increase of 11.0% in the year to August 2016. This is the second increase in a row for the annual rate of crude oil prices following 34 months of falling prices. Imported crude petroleum and natural gas was the main contributor to this rise, with an increase of 14.8% compared with an increase of 9.2% in the year to August 2016. This is the second consecutive increase seen in this index and the largest upwards movement since March 2012.

Home-produced food prices rose 10.2% in the year to September 2016, compared with a rise of 10.3% in the year to August 2016. The main contribution came from crop and animal production; hunting and related services which rose 9.4% on the year. A smaller but notable contribution came from fishing and aquaculture, with prices increasing 23.3% in the year to September 2016, the largest increase seen in this index since June 2012.

Imported metals rose 19.3% in the year to September 2016, compared with a rise of 19.1% in the year to August 2016. This is the largest upward movement seen in this index since August 2011. The main contribution to the rise came from imported products used in the manufacturing of other basic metals and casting, which rose 20.7% compared with an increase of 21.2% in the year to August 2016.

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

The seasonally adjusted core input price index rose 4.7% in the year to September 2016, compared with a rise of 6.2% in the year to August 2016. Between August and September 2016, the index fell 0.8%, compared with a rise of 0.1% between July and August 2016.

The unadjusted core input price index rose 4.9% in the year to September 2016, compared with a rise of 6.3% in the year to August 2016. This is the third month of rising prices in this index following 3 years of falling prices. The monthly index fell 0.6% between August and September 2016, compared with an increase of 0.2% between July and August 2016.

Input producer price index contribution to change in rate

The annual percentage rate for the input PPI in September 2016 rose 7.2% compared with a rise of 7.8% last month, resulting in a decrease in the annual rate of 0.6 percentage points. With the exception of crude oil and imported metals, all sections contributed to this decrease (Figure 9).

Figure 10 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 September 2015. Crude oil shows the biggest decrease in the 12-month period and also the largest range of movements, from a fall of 46.7% in September 2015 to a rise of 14.2% in September 2016.

Imported metals shows the biggest increase, ranging from a fall of 20.0% in December 2015 to a rise of 19.3% in September 2016.

Figure 10: Input PPI range of movements

UK, September 2015 to September 2016

Source: Office for National Statistics

Download this image Figure 10: Input PPI range of movements

.png (34.9 kB) .xls (29.2 kB)

Input producer prices increased by 7.2% in the year to September 2016, compared with an increase of 7.8% in the year to August 2016, the third month of positive input price inflation in a row. Output producer prices also increased in the year to September 2016, by 1.2% which would suggest higher input costs are feeding into the output prices of manufacturing goods.

The increase in producer price inflation over the past several months could be partly attributed to the changes in the sterling exchange rate. In trade weighted-terms, sterling depreciated by 14.4% in the year to September 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 imported inputs. If these producers raise their prices in response, then movements in the exchange rate can indirectly influence output producer prices. In the year to September 2016, imported goods and crude oil contributed 6.5 percentage points of the 7.2% increase in input producer prices.

However, movements in the trade-weighted exchange rate can hide the differences in the dollar-sterling and euro-sterling exchange rates. Figure 11 shows the unweighted shares of transactions of UK exports and imports in the main traded currencies. As sterling depreciated to a greater extent against the US dollar (14.3%) than the euro (14.2%) in the year to September 2016 and a higher proportion of import transactions with non-EU countries are conducted in dollars compared with EU countries, this would indicate that prices of imports from non-EU countries have been slightly more responsive to the sterling fall than the prices of imports from EU countries.

While the exchange rate is likely to have had a large impact on producer prices, the strengthening of the UK labour market may also have produced upward pressure on output prices for manufactured goods. The unemployment rate amongst those aged 16 and over remained stable at 4.9% in the 3 months to July 2016, while the employment rate amongst those aged 16 to 64 remained at 74.5% during the same period – which is the highest employment rate since records began. However, unit labour costs in the manufacturing sector, the labour cost per unit of output produced, fell by 0.2% in Quarter 2 (April to June) 2016 following a 0.5% increase in Quarter 1 (January to March) 2016.

Output across the whole economy increased by 0.7% in Quarter 2 2016 compared with Quarter 1 2016. Output in the manufacturing sector also increased by 1.6% in Quarter 2 2016, following a 0.3% decrease in Quarter 1 2016. Growth in the manufacturing sector this quarter may have made it easier for firms to pass on higher costs to their customers.

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 7 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 7 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)

The PPI 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