Producer price inflation, UK: May 2020

• The headline rate of output inflation for goods leaving the factory gate was negative 1.4% on the year to May 2020, down from a negative 0.7% in April 2020.

• The price for materials and fuels used in the manufacturing process displayed negative growth of 10.0% on the year to May 2020, up from negative growth of 10.2% in April 2020.

• Petroleum products made the largest downward contribution to the change in the annual rate of output inflation.

• Prices for petroleum products have seen a record fall on the year to May 2020, driven by large falls in crude oil prices in March and April 2020, which have continued to feed through the supply chain, as well as reduced demand for petroelum products, particularly for transport, during the coronavirus (COVID-19) pandemic.

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

Coronavirus (COVID-19) in May 2020

On 23 March 2020, the UK and devolved governments announced official guidance on restrictions on movement for the UK as a result of the coronavirus (COVID-19) pandemic. Data collection for the Producer Price Index (PPI) surveys, including the surveys measuring domestic, import and export prices for May 2020, was via paper questionnaires that were sent to businesses on 23 April 2020, asking to return prices that were applicable on or around 1 May 2020.

The closure of workplaces and premises during May 2020 as a result of the government restrictions has led to response for May 2020 being lower in comparison with other months. We closely monitor response rates in each publication and use statistical methods to deal with non-response. For further information, please see Section 8: Quality and methodology.

We have worked closely with our business respondents and data suppliers, and we have used additional data sources to quality assure the estimates in this publication. These include qualitative information sourced from manufacturing industry respondents to the Business Impact of Coronavirus (COVID-19) Survey (BICS) and anecdotal evidence from responders to both the BICS and/or PPI surveys.

Methodology changes

The Office for National Statistics (ONS) will be implementing important methodological improvements to the PPI and Services Producer Price Index (SPPI) after summer 2020. These include moving from fixed-base weights to annual chain-linking, which will improve the accuracy of these statistics. At the same time, we will be introducing changes to the level of detail of the data we publish and changes to our producer price inflation headline figure from net to gross in line with international best practice. To support users with the transition to the new headline definition, Section 6: Gross and net producer price indices includes a comparison between the existing measures of output and input producer price inflation on a net and gross basis.

We will pre-announce the exact date when these changes will be implemented over the coming few months to give users as much notice as possible.

About the PPI

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, and 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 in the domestic market. It is not limited to materials used in the final product, but it 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 (SDIL), 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 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 producer price inflation.

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 (PPIs) over the past 15 years. Input producer price inflation is driven mostly by commodity prices, which tend to be more volatile over time, compared with prices for finished goods (output producer price inflation). Input producer price inflation 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 1.4% in May 2020, down 0.7 percentage points from negative growth of 0.7% in April 2020 (Table 1). This is the second consecutive month that the rate has been negative, following 45 consecutive months of positive annual inflation, and the lowest the rate has been since December 2015.

On the month, the rate of output inflation was negative 0.3% in May 2020, up from a negative 0.8% in April 2020. The monthly rate has been negative for four consecutive months.

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.

Of the 10 product groups, four provided negative contributions to the output annual rate.

Petroleum provided the largest downward contribution of 2.13 percentage points to the annual rate (Figure 2) and had negative annual price growth of 26.8% on the year to May 2020 (Table 2). This is the lowest the annual rate has been since Producer Price Index (PPI) records began in January 1996, and it was driven by diesel and gas oil, which also had a record annual fall of 24.5%. Price movements for petroleum products in May 2020 continued the trend seen in recent months and likely reflected both demand and supply side factors during the ongoing coronavirus (COVID-19) pandemic. These include large falls in crude oil prices in March and April 2020, which take time to feed through the manufacturing sector, as well as reduced demand for petroleum products, particularly for transport, because of the lockdown measures.

Chemicals and pharmaceuticals displayed the second-largest downward contribution, of 0.12 percentage points, to the annual rate, with negative annual growth of 1.5% in May 2020. The annual rate for this product group has remained negative for 11 consecutive months and was driven by chemicals and chemical products, which had negative growth of 1.7% in May 2020.

Of the six product groups that provided a positive contribution to the annual rate, tobacco and alcohol provided the largest, at 0.38 percentage points. The annual rate for tobacco and alcohol rose by 3.8% on the year to May 2020.

On the month, output inflation was negative 0.3%. Petroleum products displayed the largest downward contribution, at 0.26 percentage points, with prices falling by 4.7% on the month in May 2020.

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

There was a 0.7 percentage point decrease in the annual rate for output prices, from negative 0.7% in April 2020 to negative 1.4% in May 2020. Of the 10 product groups, six displayed downward contributions to the change in the rate, with petroleum products providing the largest, at 0.49 percentage points (Figure 3). The annual rate of petroleum products was negative 26.8% in May 2020, down from negative 21.4% in April 2020.

Other manufactured products provided the second-largest downward contribution to the change in the rate, at 0.13 percentage points. The annual rate was negative 0.1% in May 2020, down from 0.8% in April 2020. This is the first time the annual rate has been negative for this product group since May 2000.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell by 10.0% in May 2020, up from negative 10.2% in April 2020 (Table 3). This is the fourth consecutive month that the rate has been negative.

The monthly rate for materials and fuels purchased was 0.3% in May 2020, up from a record low of negative 5.5% in April 2020. This is the first time the monthly rate has been positive since January 2020.

The annual rate of inflation for imported materials and fuels was negative 10.2% in May 2020 (Table 4), which is down 0.4 percentage points from April 2020 when it was negative 9.8%. This is the lowest the annual rate has been since December 2015. The monthly rate was 0.2% in May 2020, up 6.6 percentage points from a record low of negative 6.4% in April 2020. 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 1.2% on the month in May 2020. On the year, the ERI displayed negative growth of 1.9% in May 2020, which is down 0.3 percentage points from negative 1.6% in April 2020.

All else being equal, a fall in the value of Sterling would be expected to increase the cost of imports.

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.

Of the nine product groups, four provided negative contributions to the input annual rate.

The largest downward contribution to the annual rate came from crude oil, which contributed 11.48 percentage points (Figure 4) and had negative annual price growth of 61.7% (Table 5). This is the lowest the annual rate has been since records began in January 1996 and while it breaks the record previously set last month, it also reflects a base effect as crude oil prices, as recorded in the Producer Price Index (PPI), increased slightly between April and May 2020 but rose by more between April and May 2019. It should also be noted that, when first published, PPI crude oil prices are compiled from expected prices provided by UK refineries during the first three weeks of the reference month. They are further revised the following month when actual prices covering the full reference period become available, in line with the wider PPI revision policy. In times of greater volatility in daily oil prices, revisions may be larger than usual.

PPI prices for crude oil typically reflect a range of factors, including geopolitical events around the world and local refineries’ market conditions. The very large fall in prices in the 12-months to May 2020 continued the trend seen in April 2020 and reflected several market conditions including oversupply and reduced global demands for crude oil during the coronavirus (COVID-19) pandemic. Crude oil world prices in May 2020 have started to increase as some countries have eased lockdown and travel restrictions and global demand has picked up.

Imported chemicals provided the second-largest downward contribution to the annual rate, at 0.52 percentage points, with negative price growth of 4.0%. The annual rate for this product group has remained negative for 11 consecutive months. This was driven by imported products used in the manufacture of petrochemicals, which fell by 7.8% on the year.

The largest upward contribution to the annual rate came from imported metals, with a contribution of 0.86 percentage points and price growth of 10.4%. The annual rate for this product group has remained positive for 47 consecutive months.

On the month, six out of the nine product groups provided upward contributions to the rate. Other imported parts and equipment provided the largest upward contribution of 0.19 percentage points, with prices increasing by 1.0%.

Crude oil displayed positive monthly growth for the first time since December 2019, with prices rising by 0.5% between April and May 2020.

Figure 5 shows contributions to the change in the annual rate of inflation for materials and fuels purchased by manufacturers (input prices).

The annual rate for input prices increased by 0.2 percentage points, from negative 10.2% in April 2020 to negative 10.0% in May 2020. Of the nine product groups, five displayed upward contributions to the change in the rate, which were offset by downward contributions from three product groups.

Inputs of fuel provided the largest upward contribution to the change in the rate, at 0.33 percentage points. The annual rate of fuel rose by 4.4 percentage points, from 0.3% in April 2020 to 4.7% in May 2020. This is largely a base effect, as fuel prices were broadly unchanged between April and May 2020 but fell sharply between April and May 2019. Excess supply, particularly for gas, and unusually low demand during mild weather at the beginning of 2019 were identified as reasons for the fall in fuel prices at the time.

Home-produced food provided the second-largest upward contribution to the change in the rate, at 0.10 percentage points.

Crude oil provided the largest downward contribution to the change in the rate, at 0.23 percentage points. The annual rate of crude oil fell by 0.7 percentage points, from negative 61.0% in April 2020 to negative 61.7% in May 2020. This is largely a base effect as crude oil prices increased slightly between April and May 2020 but rose by a larger amount between the same period last year.

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 after summer 2020, in line with international best practice.

Figure 6 shows net and gross output PPIs over the past 10 years. In May 2020, the net output PPI was 114.3 while the gross output excluding duty PPI was 111.6.

Gross and net sector output PPIs display similar trends over time, although the gross indices show higher volatility, particularly at times of high inflation, either positive or negative (Figure 7). For the net output PPI, the annual growth fell to negative 1.4% in May 2020, down from negative 0.7% in April 2020. For the gross output excluding duty PPI, the annual growth in May 2020 was negative 4.7%, down from negative 3.4% in April 2020. This is the lowest the gross annual rate has been since September 2015.

Figure 8 shows the net and gross input PPIs over the past 10 years. The trends of the PPIs are similar, although the net input PPI appears more volatile than the gross input PPI. In May 2020, the net input PPI was 106.3 while the gross input PPI was 111.3.

Figure 9 also shows that the annual growth rates for the net input PPI are more volatile than for the gross input PPI. For the net input PPI, the annual growth was negative 10.0% in May 2020, up from negative 10.2% in April 2020. For the gross input PPI, the annual growth in May 2020 was negative 4.5%, which is unchanged from April 2020.

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

• Aerospace and electronic cost indices time series (MM19)

• Producer price inflation time series (MM22)

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 producer price inflation 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).

More quality and methodology information on strengths, limitations, appropriate uses, and how the data were created is available in the Producer Price Indices (PPIs) QMI.

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 between January and 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 PPIs, including the import and export index, is available. PPIs methods and guidance (PDF, 1.14MB) provides an outline of the methods used to produce the PPIs as well as information about recent PPI developments.

Gross sector basis figures, which include intra-industry sales and purchases, are shown in the producer price inflation dataset Tables 4 and 6.

The detailed input indices of prices of materials and fuels purchased by industry (producer price inflation 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.

Coronavirus (COVID-19)

As highlighted in Section 2: Things you need to know about this release, the coronavirus (COVID-19) pandemic has impacted on response rates in this release and is likely to be a factor in reduced response for future releases.

Table 6 shows the response rates to the domestic (PPI), export (Export Price Index (EPI)) and import (Import Price Index (IPI)) price surveys at time of publishing for each reference period. Response rates were lower in April and May 2020 compared with other months. While the response rate for the main PPI domestic survey shows a small improvement in May 2020 compared with April 2020, response rates for the EPI and IPI in May 2020 have shown an additional fall compared with April 2020 and they are around 25 percentage points lower than historical levels.

The administrative data used as part of the PPI has largely been unaffected by the coronavirus pandemic and lockdown, with the exception of some food items whose prices are collected by the Department for Environment, Food and Rural Affairs (Defra). The coronavirus pandemic has caused unusual patterns of both supply and demand at horticultural markets, where Defra collects food prices for the Office for National Statistics (ONS). The Horticultural Market Inspectors are no longer inspecting markets but are collecting data by telephone where they can. Some Defra food data are therefore based on small sample numbers as a result of both reduced trade volumes and working patterns.

The fall in response rates in May 2020 is unlikely to have had a substantial impact on the headline PPI figures. However, the smaller sample sizes are likely to have increased volatility for some of the lower-level indices, particularly among IPIs and EPIs. Revisions are also likely to be larger than usual over the next few months.

Producer prices are normally imputed for non-response by using ratio imputation. The ratio imputation method calculates the growth within an index based on prices that have been returned and then applies it to the last known value for the missing price. This method ensures that if prices for a group of products increase (decrease) from one month to the next, the imputed values for non-respondents in that product group will also increase (decrease) when compared with the last known value.

In a small number of cases, prices may be manually imputed by directly using the latest available price from the latest available period. This method is applied when the nature of the product or previous information from respondents indicate that a price change is unlikely (that is, long-term contracts and fixed listing prices).

These are simple but effective methods, used as a standard internationally and recommended by international organisations specifically for treatment of missing producer prices because of the coronavirus pandemic (PDF, 52KB).

Links to additional ONS sources of coronavirus information

Various articles have been published that help describe the ONS’ response to how the coronavirus might be seen in our estimates:

• Coronavirus and the effects on UK prices (published 6 May 2020)

• Meeting the challenge of measuring the economy through the COVID-19 Pandemic (published 6 May 2020)

• Coronavirus and the effects on UK GDP (published 6 May 2020)

• Real-time turning point indicators: a UK focus (published 27 April 2020)

• Communicating gross domestic product (published 27 April 2020)

Our latest data and analysis on the impact of the coronavirus on the UK economy and population are also available.

The Office for National Statistics (ONS) has released a public statement on the coronavirus and the production of statistics, and any specific queries on this can be directed to the Media Relations Office.

After EU withdrawal

As the UK leaves the EU, it is important that our statistics continue to be of high quality and are internationally comparable. During the transition period, those UK statistics that align with EU practice and rules will continue to do so in the same way as before 31 January 2020.

After the transition period, we will continue to produce our inflation statistics in line with the UK Statistics Authority’s Code of Practice for Statistics and in accordance with internationally agreed statistical guidance and standards.