Producer price inflation, UK: July 2018

• The headline rate of inflation for goods leaving the factory gate (output prices) was 3.1% on the year to July 2018, down from 3.3% in June 2018.

• Prices for materials and fuels (input prices) rose 10.9% on the year to July 2018, up from 10.3% in June 2018.

• All product groups provided upward contributions to output annual inflation; the largest contribution was made by petroleum products.

• Input annual inflation increased for the fifth consecutive month; crude oil provided the largest upward contribution to the annual and monthly rate.

We will be carrying out a public consultation over the next few weeks to collect users’ views on possible changes to published Producer Price Index (PPI) indices. Please email ppi@ons.gov.uk with your contact details if you want to be informed about the launch of the consultation.

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.

The use of core input inflation removes the more volatile indices of food, tobacco, beverages and petrol from our price values.

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 (SIC) code appropriate to the index and a four-character alpha-numeric code, 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 normally subject to revisions in light 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) 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.

The annual rate of inflation for goods leaving the factory gate (output prices) fell by 0.2 percentage points to 3.1% in July 2018 (Table 1). The 12-month rate of output inflation has been positive since July 2016. Despite falling on the month, petroleum products displayed the largest annual growth of 15.9% (Table 2). On the month, output prices were flat.

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

Petroleum products provided the largest upward contribution of 1.10 percentage points to the annual rate (Figure 2), due to price growth of 15.9% on the year to July 2018 (Table 2). This growth was driven mainly by prices for diesel and gas oil, which rose 15.0% on the year.

Chemicals and pharmaceuticals showed the second-largest upward contribution to the annual rate (0.49 percentage points), despite the 12-month rate slowing slightly from 6.9% in June 2018 to 6.7% in July 2018. Annual growth in this product group has been positive since July 2016.

The largest downward contribution to the monthly rate of output inflation came from petroleum products (0.05 percentage points). The monthly growth decreased by 1.6 percentage points to a negative 0.6% in July 2018.

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

There was a 0.2 percentage points fall in the annual rate between June 2018 and July 2018, with seven product groups displaying small downward contributions. The largest downward movement came from food products at 0.06 percentage points.

Tobacco and alcohol provided a small upward contribution to the change in rate, at 0.02 percentage points.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) rose to 10.9% in July 2018, up 0.6 percentage points from June 2018 (Table 3). This is the highest the annual rate has been since May 2017. The 12-month rate of input inflation has been positive since July 2016. The annual rate was driven by crude oil prices, which increased to 51.9% on the year in July 2018, up from 50.2% in June 2018.

The one-month rate for materials and fuels was 0.5%, up from 0.3% in June 2018 (Table 3). This is the fifth consecutive month of positive monthly inflation after prices were negative in February 2018.

The annual rate of inflation for imported materials and fuels was 10.0% in July 2018 (Table 4), up from 9.2% in June 2018. This is the highest the rate has been since June 2017 and the fourth consecutive increase to the 12-month rate. 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 by 0.4% to 78.2 in July 2018. On the year, the ERI increased by 1.6% in July 2018, down from 1.8% in June 2018. All else equal, a weaker sterling effective exchange rate will lead to more expensive inputs of imported materials and fuels. This may have contributed in part to the increase in the annual and monthly rates of inflation for imports in July 2018.

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

The largest upward contribution to the annual rate in July 2018 came from crude oil, which contributed 7.24 percentage points (Figure 4) and had annual price growth of 51.9% (Table 5), up from 50.2% last month. The upward contribution from crude oil was driven mainly by imported crude petroleum and natural gas prices, which rose 49.5% on the year.

Fuel and imported metals provided the second- and third-largest contributions to the annual rate, with 1.13 and 0.91 percentage points respectively. Fuel prices rose 10.8% on the year, while prices for imported metals rose 11.2%.

Crude oil prices were also the main driver to the increase in the monthly input inflation rate, with an upward contribution of 0.23 percentage points and a price growth of 1.3%.

Home food materials provided the second-largest upward contribution to the monthly rate of 0.14 percentage points, with price growth of 0.9%. This was driven mainly by home-produced fruit, which rose 29.8% on the year. This increase is due to the current weather conditions, with the high temperatures and lack of rainfall causing yields to fall. This has resulted in short supply whilst demand has remained high.

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 0.6 percentage points increase in the annual rate for inputs between June 2018 and July 2018, with seven product groups displaying upward contributions to the change in the rate. Crude oil provided the largest upward contribution of 0.22 percentage points. The second largest upward contribution to the change in rate came from other imported parts and equipment, at 0.15 percentage points, with the other five product groups displaying small positive contributions.

Imported metals and other home-produced materials provided small negative contributions to the change in the rate, at 0.08 and 0.03 percentage points respectively.

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

Aerospace and electronic cost indices time series data Producer Price Index time series data

Higher, lower and equal movements for each Producer Price Index (PPI) 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-month (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 20 March 2017. The article presented the calculated standard errors of the 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 (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.