Services producer price inflation, UK: : January to March 2015

• The price of services sold by UK companies, as estimated by the aggregate Services Producer Price Index (SPPI), increased 0.6% in the year to quarter 1 of 2015, compared with an increase of 0.4% in the year to quarter 4 of 2014

• Between quarter 4 of 2014 and quarter 1 of 2015 the aggregate SPPI rose by 0.2%, compared with no movement between quarter 3 and 4

• Accommodation and food, and transportation and storage provided the greatest upward contributions to the annual rate of inflation. This was partially offset by a fall in prices for water supply, sewerage and waste management services

• Accommodation and food showed the largest rise in prices with prices increasing by 4.2% in the year to quarter 1 of 2015

• Water supply, sewerage and waste management services showed the largest fall in prices decreasing by 6.2% in the year to quarter 1 of 2015

The Services Producer Price Index (SPPI) provides a measure of inflation for the UK service sector. It is constructed from a statutory quarterly survey which measures changes in the price received for selected services provided by UK businesses to other UK businesses and government. Individual SPPIs are available which provide information on price change for a selection of service industries. These individual price indices are also aggregated together to create a service industry SPPI with limited coverage (it does not provide full coverage of the 'service sector').

The primary use of the SPPI is as a deflator in the UK National Accounts. However, it is also important as an inflationary measure to inform monetary policy and to account for inflation in long-term service procurement contracts. For more information on the use made of SPPI please see the separate document users of Services Producer Price Indices data (67.2 Kb Pdf).

The figures presented in this statistical bulletin are considered provisional for the latest 2 quarters (quarter 4 of 2014 and quarter 1 of 2015) and may be revised as late data is received.

None of the indices presented in this bulletin are seasonally adjusted.

Coverage of SPPI

The service sector currently accounts for around 78% of the UK economy based on its weight in Gross Domestic Product (GDP). ONS does not currently produce an SPPI for every industry in the service sector and so the aggregate SPPI is a partial, best estimate, of the overall inflation to UK businesses in the service sector. Currently, ONS estimates that the SPPIs presented in this statistical bulletin represent 59% of the total service sector at industry level. The SPPI's coverage of the service sector at SIC class, division and section level is available in the SPPI coverage document. As resources allow, ONS will continue to review the existing SPPIs and expand coverage through developing SPPIs for new industries. As such, the aggregate SPPI will change composition from time to time but will always remain ONS' best estimate of inflation in the UK service sector. The fact that coverage may change over time should be considered by users when deciding which indices best meet their needs.

Newly developed SPPIs

A development project to increase the industrial coverage of the SPPI took place between 2009 and 2012 and has resulted in the development of 8 new SPPIs. These are:

• accountancy services

• legal services

• architectural services

• engineering services

• cargo handling services

• advertising services

• business management consultancy

• storage and warehousing

Since their development, these indices have been published as experimental series. Since the 2013 quarter 4 release, these indices are no longer published separately but are instead included in this release and make up part of the aggregate SPPI. The inclusion of these new indices has changed the composition of the aggregate SPPI, increasing the coverage of the service industry and improving the measure. Further information about the impact of adding these new indices to the aggregate can be found in the 2013 quarter 4 statistical bulletin.

All of the statistics contained in this release are official statistics. However, since these newly developed series have not yet undergone a full assessment against the Code of Practice for Official Statistics by the UK Statistics Authority they cannot currently be labelled as National Statistics.

Between mid 2005 and mid 2008, the annual rate of inflation in the service sector, as estimated by the aggregate Services Producer Price Index (SPPI), rose steadily from an annual rate of 1.3% in quarter 2 of 2005 to a peak of 3.7% during quarters 1 and 2 of 2008. At the end of 2008, the rate of inflation fell rapidly, from annual inflation of 3.6% in quarter 3 of 2008 to deflation (prices lower than they were in the same quarter of the previous year) of 1.6% in quarter 3 of 2009.

The annual rate of inflation began to increase at the end of 2009, reaching its post-economic downturn high of 1.8% in quarter 2 of 2010. Since mid 2010, inflation has tended to remain relatively steady at around 1%. In quarter 1 of 2015, prices increased by 0.6%, this remains one of the smallest increases in prices seen since the economic downturn of 2008/09 (Figure A).

Looking at the latest estimates (Table A) of the aggregate SPPI for quarter 1 of 2015, the main movements were as follows:

• prices received by UK service providers increased 0.6% in the year to quarter 1 of 2015, up from an increase of 0.4% in quarter 4 of 2014

• the main upward contributions to the annual rate came from increases in the prices charged for accommodation and food, and transportation and storage services, however, these were partially offset by falls in the price of water supply, sewerage and waste management services

• service prices rose 0.2% between quarter 4 of 2014 and quarter 1 of 2015, compared with no movement between quarter 3 and 4 of 2014

• the main upward contribution to the quarterly rate of inflation came from professional, scientific and technical activities

• Water supply, sewerage & waste management services showed the greatest decrease in prices falling by 6.2% in the year to quarter 1 of 2015 compared with a decrease of 2.0% last quarter

The aggregate Services Producer Price Index (SPPI) increased by 0.6% in the year to quarter 1 of 2015, up from a rise of 0.4% in the year to quarter 4 of 2014. Of the 10 sections (as defined by the Standard Industrial Classification) that are combined to form the aggregate SPPI, 6 showed price increases.

The main upward contributions to the annual rate of the aggregate SPPI came from accommodation and food, which increased 4.2% in the year to quarter 1 of 2015 (up from a decrease of 2.7% last quarter) and transportation and storage, which increased by 1.1% in the year to quarter 1 of 2015 (down from a rise of 1.8% last quarter). Increases in real estate activities and professional, scientific and technical activities have also had a notable affect on the aggregate in the year to quarter 1 of 2015 increasing by 3.5% and 0.6%, respectively. These increases were partially offset by a fall in the price of water supply, sewerage and waste management services where prices fell by 6.2% in the year to quarter 1 of 2015 (down from a decrease of 2.0% last quarter). (Table B and Figure B).

Increases in price for accommodation and food services, and transportation and storage provided the main contributions to the rise in the aggregate SPPI in the year to quarter 1 of 2015.

Accommodation and food services prices increased by 4.2% in the year to quarter 1 of 2015. This was mainly caused by a rise in the prices received by UK businesses for hotel services. Hotel services prices increased by 6.0% in the year to quarter 1 of 2015, compared with a decrease of 5.6% last quarter. This rise is mainly a result of increases in daily delegate rates in London where prices have risen by 10.0% in the year to quarter 1 of 2015, up significantly from a fall of 15.5% last quarter. Demand for conferencing services has meant that hotels have been able to raise their prices (Figure C).

Transportation and storage prices also made a notable upward contribution to the annual rate of inflation seen in the aggregate SPPI. Prices increased by 1.1% in the year to quarter 1 of 2015, down from an increase of 1.8% last quarter. This was caused mainly by an increase in the price of business airfares, where prices increased by 5.4% in the year to quarter 1 of 2015, up slightly from an increase of 5.1% last quarter, as a result of increases in prices for all fare types. Price increases for national post (up 4.6% in the year to quarter 1 of 2015, the same increase as last quarter) and courier services (up 1.4% in the year to quarter 1 of 2015, up from 0.9% last quarter) also made a significant contribution to the annual rate of inflation seen for transportation and storage services.

The increases seen in accommodation and food, and transportation and storage were partially offset by a fall in the prices charged for water supply, sewerage and waste management services where prices fell 6.2% in the year to quarter 1 of 2015, down from a decrease of 2.0% last quarter. This is mainly as a result of the decrease in prices for sorted recovered materials services where prices fell 16.8% in the year to quarter 1 of 2015, down from a fall of 12.7% last quarter. This fall in the index is driven by the drop in the re-sale value of recovered oil.

Slightly smaller contributions to the growth in the aggregate SPPI came from real estate activities and professional, scientific and technical activities with prices increasing by 3.5% and 0.6% respectively in the year to quarter 1 of 2015. The increase in real estate was as a result of an increase in the fees received by estate agents, which rose by 8.3% in the year to quarter 1 of 2015, down from an increase of 9.0% last quarter. Price rises were mainly seen for the service of letting offices and were as a result of increases in property values rather than an increase in the percentage fee charged by the estate agent (Figure D). The increase in professional, scientific and technical activities prices was as a result of an increase in accountancy prices which rose by 4.0%, the same increase as last quarter. This was as a result of increased activity in audit and assurance services where respondents indicated that quarter 1 is usually a busy time for them, pushing up prices.

Examining inflation for each of the sections that are combined to form the aggregate SPPI reveals a diverse set of trends. Figure E shows both the range of annual inflation rates experienced by each of the sections since quarter 1 of 2011 and the annual rate of inflation for the two most recent quarters. Looking at the most recent quarters, half of the 10 sections saw a fall in the annual inflation rate between quarter 4 2014 and quarter 1 2015 while half experienced an increase in inflation. Three of the sections now stand at a 4 year low, consistent with the relatively low aggregate SPPI. However, accommodation and food together with information and communication have increased from their relative lows in quarter 4 2014, reflecting the slight pick-up in the headline rate.

Figure E: Services Producer Price Index by Section

Quarter 1 (Jan to Mar) 2011 to Quarter 1 (Jan to Mar) 2015, United Kingdom

Source: Service Producer Price Index (SPPI) - Office for National Statistics

Notes:

1. Q1 refers to quarter 1 (January to March), Q2 refers to quarter 2 (April to June), Q3 refers to quarter 3 (July to September) and Q4 refers to quarter 4 (October to December)

One long-term trend is the difference across sections in the range of inflation rates experienced since 2011 quarter 1. Education, accommodation and food, and water supply, sewerage and waste management services have experienced a relatively wide range of inflation rates over this period. Although all sections have experienced some variance in inflation, certain industries have experienced inflation consistently higher than others. Wholesale, retail trade and repair of motor vehicles and motorcycles has not experienced inflation lower than 1.7% at any point in the past four years, while other services, administrative and support services, and information and communication have not experienced inflation higher than 1.5%.

Prices received for the services included in the aggregate Services Producer Price Index (SPPI) rose 0.2% between quarter 4 of 2014 and quarter 1 of 2015, compared to no movement between quarter 3 and 4 of 2014. Of the 10 sections that make up the aggregate SPPI, 8 showed increases in prices between quarter 4 of 2014 and quarter 1 of 2015. The majority of these increases were small, however, ranging from 0.2% to 0.7%. SPPI fell 0.1% between quarter 3 and 4 of 2014, down from an increase of 0.1% seen between quarter 2 and 3. Of the 10 sections that make up the aggregate SPPI, half showed a fall in prices between quarter 3 and quarter 4 of 2014.

The main contribution to the increase in the quarterly rate came from professional, scientific and technical activities, which increased by 0.4% between quarter 4 of 2014 and quarter 1 of 2015. (Table C and Figure F).

Professional, scientific and technical activities prices rose 0.4% between quarter 4 of 2014 and 1 of 2015, compared with an increase of 0.1% last quarter. The main contribution to the current quarterly rate came from accountancy prices, which increased by 2.2%. This is compared with an increase of 1.4% between quarter 3 and quarter 4 of 2014. This rise in the accountancy index was driven by extra demand for these services in the first quarter of the year, with contributors indicating that this is usually their busiest time of the year. (Figure G).

Comparison with Average Weekly Earnings

The aggregate Services Producer Price Index (SPPI) captures changes in the prices received by UK business for the provision of a selection of services to other UK businesses and the public sector. For many services, the cost of manpower is the largest component of the price charged by businesses for providing the service, rather than the cost of goods or fuels. As a result, it is expected that the price charged for services should move in a similar way to the wages received by the UK workforce. Figure H shows a comparison of the annual percentage change of the fees received by UK businesses for the provision of services, as estimated by the aggregate SPPI, with an indicator of salaries received by the UK workforce who are employed in the service sector, as estimated by the Average Weekly Earnings (AWE) ‘Services’ pay index excluding bonuses.

As would be expected, the annual percentage change for AWE services follows a similar pattern to the SPPI. From 2001 to late 2008, both the AWE for services and the aggregate SPPI show similar trends, although AWE growth was significantly stronger. During the economic downturn in 2008/09 the rate of growth in both wages and service prices slowed dramatically. However while prices received for services started to fall in 2009, wages continued to grow compared with a year earlier, albeit at a much lower rate. Since quarter 4 of 2010 both AWE and the aggregate SPPI have shown lower growth that before the economic downturn. In the last two years the AWE services and SPPI indices have both shown growth of around 1%. However in the last 2 quarters the AWE services index has shown stronger growth than SPPI, the rises in the AWE services index has been driven by the wholesale and retail sector which is not measured in the SPPI.

Comparison with Consumer Prices Index

While the SPPI measures the amount received by a company for services they’ve provided to other businesses, the prices paid by households is estimated by the consumer prices index (CPI). While the costs associated with providing services to both businesses and households will be broadly similar, there may be different costs associated with providing services to different customers. Figure H shows a comparison with the ‘all services’ sector of the Consumer Prices Index (CPI) which measures the prices paid for services by households.

Generally inflation in the CPI ‘all services’ index runs at a higher rate than the SPPI. Between late 2005 and 2008 the gap between the SPPI and CPI annual rate of inflation narrowed before widening again from 2009 to present. During the economic downturn in 2008/09 the annual rate of inflation for both indices decreased, with prices falling by as much as 1.6% for services sold by UK businesses while the prices paid by households continued to grow, although at a much lower rate, reaching a low of 2.8% in quarter 1 of 2010. Since quarter 4 of 2010 both indices have shown growth however the SPPI has shown significantly lower growth than CPI.

Other measures of Service Sector Inflation

There are other measures of service sector inflation available such as the Chartered Institute of Procurement & Supply (CIPS) purchasing managers’ index and the Confederation of British Industry (CBI) service sector survey. There are significant methodological differences between these surveys and SPPI, therefore direct comparisons cannot be made.

All countries within the European Union are required to produce a measure of inflation for the service sector under the Short Term Statistics Regulation. Figure J shows the growth rates of service producer prices for a selection of EU countries since quarter 1 2010. The United Kingdom and Sweden recorded largely stable service producer price indices, growing by 2.4% and 1.8% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France and Spain, where service sector inflation has been negative since quarter 3 2011 in the case of Spain and quarter 1 2013 for France.

At the aggregate level, both a net and gross sector Services Producer Price Index (SPPI) is produced. The prices used to construct both of these indices are the same but different weights are used to construct the net sector index compared with the gross sector.

Summary of Net Sector movements

In quarter 1 of 2015, movements in the net sector aggregate SPPI were as follows:

• annual inflation rose 0.7%, up from 0.5% in quarter 4 of 2014

• between quarter 4 of 2014 and quarter 1 of 2015 quarterly inflation stood at 0.3%, compared with a fall of 0.1% between quarter 3 and 4 of 2014

Generally, the movements of the net sector aggregate SPPI are similar to those of the gross sector indices with the net sector aggregate tending to inflate at a slightly higher rate than the gross sector indices (Figure K).