Producer price inflation, UK: October 2019

• The headline rate of output inflation for goods leaving the factory gate was 0.8% on the year to October 2019, down from 1.2% in September 2019.

• The growth rate of prices for materials and fuels used in the manufacturing process was negative 5.1% on the year to October 2019, down from negative 3.0% in September 2019.

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

• Crude oil provided the largest downward contribution to the change in 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 and input 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 from 1.2% in September 2019 to 0.8% in October 2019 (Table 1). The annual rate has remained positive since July 2016, but this is the lowest the rate has been since August 2016.

The monthly rate was a negative 0.1% in October 2019, which is unchanged from September 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.

Other manufactured products provided the largest upward contribution of 0.24 percentage points to the annual rate (Figure 2), with price growth of 1.5% on the year to October 2019 (Table 2). Despite providing the largest contribution, this is the lowest the annual rate has been within this product group since January 2018 and the third consecutive month that it has slowed. The growth within this product group was driven by other non-metallic mineral products.

Tobacco and alcohol products displayed a similar upward contribution of 0.23 percentage points to the annual rate, with annual growth of 2.4% in October 2019.

Petroleum products, and chemicals and pharmaceuticals were the only product groups to provide negative contributions to the annual rate, at 0.47 and 0.12 percentage points respectively. These two product groups have provided negative contributions to the annual rate for the last four months. Petroleum products fell 5.7% on the year to October 2019, which is the lowest the rate has been since June 2016.

Five product groups provided a negative contribution to the monthly rate of output inflation, the largest coming from petroleum at 0.08 percentage points, which was driven by a monthly fall of 0.7%.

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

There was a 0.4 percentage point decrease in the annual rate for output prices, from 1.2% in September 2019 to 0.8% in October 2019, with 7 of the 10 product groups displaying downward contributions to the change in the rate. Petroleum products provided the largest downward contribution, at 0.20 percentage points (Figure 3).

Clothing, textile and leather products provided the second-largest downward contribution to the change in the rate, at 0.11 percentage points.

Two industries (food products, and metal, machinery and equipment) provided small upward contributions to the change in the rate, with computer, electrical and optical products displaying no movement either way.

The annual rate of inflation for materials and fuels purchased by manufacturers (input prices) fell 2.1 percentage points from a negative 3.0% in September 2019 to a negative 5.1% in October 2019. This is the third consecutive month in which the rate has been negative, following 37 consecutive months of positive annual growth from July 2016 to July 2019. This is also the lowest the annual rate has been since April 2016.

The monthly rate for materials and fuels purchased was also negative for the third consecutive month, falling from negative 0.9% in September 2019 to negative 1.3% in October 2019 (Table 3).

The annual rate of inflation for imported materials and fuels was a negative 3.8% in October 2019 (Table 4), which is down 2.8 percentage points from September 2019. This is the second consecutive month that the rate has been negative and the lowest it has been since April 2016. The monthly rate also fell, from a negative 0.9% in September 2019 to a negative 1.9% in October 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) grew by 2.2% on the month to 78.3 in October 2019. This is the highest the index value has been since May 2019. On the year, the ERI displayed negative growth of 0.4% in October 2019. This is the fifth consecutive month that the annual rate has been negative (source: Bank of England).

All else equal a stronger sterling effective exchange rate will lead to less expensive inputs of imported materials and fuels.

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.

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

The largest downward contribution to the annual rate in October 2019 came from crude oil, which contributed 4.59 percentage points (Figure 4) and had negative annual price growth of 22.9% (Table 5). This downward contribution was driven by imported crude petroleum and natural gas. Crude oil has now displayed negative annual growth for six consecutive months and this is the lowest the rate has been since April 2016. A base year effect of high annual inflation this time last year has contributed to this fall.

The monthly rate for world crude oil prices fell 4.6% in October 2019, with an average price of US $57 per barrel (source: World Bank). The annual rate for world crude oil fell 25.4%, which is the 11th consecutive month that the rate has been negative and the lowest the rate has been since May 2016.

Home food materials provided the second-largest downward contribution to the annual rate at 0.99 percentage points, with negative price growth of 7.3%. This was driven by domestic products used in the crop and animal production; hunting and related service activities, which had negative growth of 7.8% on the year and continues four months of negative growth.

The largest upward contribution to the annual rate came from imported metals, with a contribution of 0.71 percentage points and price growth of 9.0%.

Crude oil also provided the largest downward contribution on the month, at 0.91 percentage points, with negative monthly growth of 5.3%.

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 2.1 percentage point decrease in the annual rate for input prices, from a negative 3.0% in September 2019 to a negative 5.1% in October 2019, with six out of the nine product groups displaying downward contributions to the change in the rate. Crude oil provided the largest downward contribution, at 1.72 percentage points.

Other imported parts and equipment, and other imported materials provided the second-largest downward contributions to the change in the rate, both at 0.14 percentage points.

Fuel provided the largest upward contribution to the change in the rate, at 0.14 percentage points.

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 October 2019, the net output PPI was 116.0 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 0.8% in October 2019, compared with 1.2% in September. For gross output excluding duty PPI, the annual growth in October 2019 was a flat 0.0%, while in September it was 0.8%.

Figure 8 shows net and gross input PPI over the past 10 years. Likewise, the trends of the indices are similar, although the net input PPI appears more volatile than the gross input PPI. In October 2019, the net input PPI was 115.0 while the gross input PPI was 115.7.

Figure 9 also shows that the annual growth rates for net input PPI are more volatile than for gross input PPI. For net input PPI, the annual growth was negative 5.1% in October 2019, compared with negative 3.0% in September. For gross input PPI, the annual growth in October 2019 was negative 1.7%, while in September it was negative 0.9%.

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.