Producer price inflation, UK: August 2019

• The headline rate of output inflation for goods leaving the factory gate was 1.6% on the year to August 2019, down from 1.9% in July 2019.

• The growth rate of prices for materials and fuels used in the manufacturing process was negative 0.8% on the year to August 2019, down from 0.9% in July 2019.

• Transport equipment provided the largest upward contribution to the annual rate of output inflation.

• Crude oil provided the largest downward contribution to the annual rate of input inflation.

The Office for National Statistics (ONS) has published its response to the public consultation to collect users’ views on possible changes to the level of detail published in the Producer Price Indices (PPI).

We remind users of the planned changes to our PPI headline figure from net to gross in line with international best practice. In order to support users with the transition to the new headline definition, Section 6 includes a comparison between the existing measures of output PPI on a net and on a gross basis.

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 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 statistics.

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 Standard Industrial Classification 2007: SIC 2007 code appropriate to the index, and a four-character alpha-numeric code (series ID), 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 subject to revisions taking account of late and revised respondent data. 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.

Figure 1 shows input and output Producer Price Indices (PPI) over 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 (output PPI). Input PPI is also sensitive to exchange rate movements as roughly two-thirds of inputs into the UK manufacturing sector are imported.

The annual rate of inflation for goods leaving the factory gate (output prices) slowed to 1.6% in August 2019 from 1.9% in July 2019 (Table 1). The annual rate has remained positive since July 2016.

The monthly rate fell to a negative 0.1% in August 2019, down 0.4 percentage points from July 2019.

Figure 2 shows contributions by product group to the monthly and annual rate of output inflation and Table 2 shows monthly and annual growth rates by product group.

Eight of the ten product groups provided positive contributions to the output annual rate.

Transport equipment provided the largest upward contribution of 0.32 percentage points to the annual rate (Figure 2), with price growth of 2.8% on the year to August 2019 (Table 2). This is the highest the annual rate has been within this industry since September 2017 and is driven by motor vehicles, trailers and semi-trailers.

Other manufactured products displayed a similar upward contribution of 0.31 percentage points to the annual rate, with annual growth of 2.2% in August 2019.

Petroleum products and chemicals and pharmaceuticals were the only product groups to provide negative contributions to the annual rate for the second consecutive month, at 0.14 and 0.05 percentage points respectively.

Food products provided the largest downward contribution to the monthly rate of output inflation, at 0.45 percentage points. This product group displayed negative inflation of 0.5% on the month in August 2019 which is the lowest the rate has been since January 2018.

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

There was a 0.3 percentage point decrease in the annual output rate between July and August 2019, with five of the ten product groups displaying downward contributions to the change in the rate. Petroleum products provided the largest downward contribution to the change in the rate, at 0.13 percentage points (Figure 3). Computer, electrical and optical equipment and food products made similar downward contributions of 0.10 and 0.09 percentage points respectively.

Clothing, textile and leather made the largest upward contribution to the change in the rate, at 0.06 percentage points.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) was a negative 0.8% in August 2019, down 1.7 percentage points from July 2019 (Table 3). This fall is driven by crude oil, which has shown negative annual growth for four consecutive months.

The one-month rate for materials and fuels purchased fell from 0.6% in July 2019 to a negative 0.1% in August 2019 (Table 3).

The annual rate of inflation for imported materials and fuels was a negative 0.1% in August 2019 (Table 4), which is down 0.5 percentage points from July 2019. The monthly rate also slowed from 1.1% in July 2019 to 0.5% in August 2019. 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 1.7% on the month to 74.8 in August 2019. This is the lowest the index has been since October 2016 and the fifth consecutive month where the sterling index has fallen. On the year, the ERI fell 3.4% which is the largest annual drop since August 2017 (source: Bank of England).

Figure 4 shows contributions by product group to the monthly and annual rate of input inflation and Table 5 shows monthly and annual growth rates by product group.

Three of the nine product groups provided negative contributions to the input annual rate.

The largest downward contribution to the annual rate in August 2019 came from crude oil, which contributed 2.09 percentage points (Figure 4) and had negative annual price growth of 11.6% (Table 5). This compares to an annual price growth of 41% this time last year. The Brent average price for crude oil at $59 per barrel in August 2019 is 19% lower than a year ago. The base year effect of high annual inflation and a higher price this time last year has contributed to crude oil being at its lowest annual rate since June 2016.

Home food materials provided the second-largest downward contribution to the annual rate at 0.76 percentage points with negative price growth of 5.8%. This was driven by domestic products used in the crop and animal production; hunting and related service activities, which fell to a negative 6.5% on the year and is the lowest the rate has been for this product group since April 2016.

The final downward contribution came from imported chemicals with a small 0.02 percentage points.

The largest upward contributions to the annual rate came from imported metals and inputs of fuel with 0.59 and 0.56 percentage points respectively. Imported metal prices are up 7.7% on this time last year and has displayed positive inflation since July 2016.

On the month, crude oil provided the largest negative contribution of 0.59 percentage points with negative monthly growth of 3.4%. The only other downward contribution to the monthly rate came from home food materials at 0.45 percentage points.

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 1.7 percentage point decrease in the annual rate for input prices between July 2019 and August 2019, with five out of the nine product groups displaying downward contributions to the change in the rate. Home food materials provided the largest downward contribution of 0.83 percentage points, with crude oil making a similar negative contribution of 0.81 percentage points. Smaller negative contributions came from fuel, imported food materials and other imported parts and equipment.

Imported metals made the largest upward contribution to the change in the rate at 0.17 percentage points. Other imported materials, imported chemicals and other home-produced materials made smaller upward contributions.

Producer price indices (PPIs) are measured on two different bases, gross and net of inter-sector sales. Gross sector PPIs include products sold by one business to another business classified to the same industry sector. Net sector PPIs exclude (net out) products sold by a business to another business classified to the same industry sector. The Office for National Statistics (ONS) currently headlines with net sector PPIs, which include duty. We will move our headline to a gross sector basis excluding duty early in 2020, in line with international best practice.

Figure 6 shows net and gross output producer price indices (PPI) over the past 10 years. In August 2019, the net output PPI was 116.1 while the gross output excluding duty PPI was 117.2.

As shown in Figure 7, gross and net sector output indices display similar trends over time, although the gross indices show higher volatility, particularly at times of high inflation, either positive or negative. For net output PPI, the annual growth was 1.6% in August 2019, compared to 1.9% in July; for gross output excluding duty PPI, the annual growth in August 2019 was 1.3%, while in July it was 1.7%.

A further update will be published in October 2019, detailing the move to a gross sector basis for the PPI input series.

In addition to the data included within this statistical bulletin, the following detailed datasets are available:

• Aerospace and electronic cost indices time series

• Producer Price Index time series

Higher, lower and equal movements for each Producer Price Index are shown in the Producer price inflation records: monthly figures.

A summary of the revisions to PPI data are available in the PPI revision triangles:

• Producer price inflation revision triangle: total output 12-months (JVZ7)
• Producer price inflation revision triangle: total output 1-month (JVZ7)
• Producer price inflation revision triangle: total input 12-months (K646)
• Producer price inflation revision triangle: total input 1-month (K646)

Other important measures of inflation and prices include the Consumer Prices Index (CPI) and the Services Producer Price Index (SPPI).

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 18 May 2018. The tables present the calculated standard errors of the PPI during the period January 2017 to December 2017, 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.