Services producer price inflation, UK: January to March 2016

Quarterly estimates of price changes for services provided by UK businesses to other UK businesses and government, for a limited range of service industries.

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Contact:
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Release date:
25 May 2016

Next release:
24 August 2016

1. Main points

The price of services sold by UK companies, as estimated by the aggregate Services Producer Price Index (SPPI), increased 1.4% in the year to Quarter 1 of 2016, compared with an increase of 0.7% in the year to Quarter 4 of 2015.

Between Quarter 4 2015 and Quarter 1 2016, the aggregate SPPI rose by 0.6%, compared with an increase of 0.5% between Quarters 3 and 4 of 2015.

Real estate activities continued to show the largest rise in prices, with prices increasing by 3.8% in the year to Quarter 1 of 2016.

Water supply, sewerage and waste management services showed the largest fall in prices, decreasing by 6.0% in the year to Quarter 1 of 2016.

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2. What is Services Producer Price Inflation?

The Services Producer Price Inflation (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 inflation data.

The figures presented in this statistical bulletin are considered provisional for the latest 2 quarters (Quarter 4 2015 and Quarter 1 2016) 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). We do 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, we estimate 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 standard industrial classification (SIC) class, division and section level is available in the SPPI coverage document. As resources allow, we 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 our best estimate of inflation in the UK service sector. The fact that coverage may change over time should be considered when deciding which indices best meet your needs.

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3. Summary

Between early-2006 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 2.4% in Quarter 1 of 2006 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 2016, prices increased by 1.4%.

Looking at the latest estimates (Table A) of the aggregate SPPI for Quarter 1 of 2016, the main movements were:

  • prices received by UK service providers increased 1.4% in the year to Quarter 1 of 2016, up from an increase of 0.7% in Quarter 4 of 2015
  • the main upward contributions to the annual rate came from increases in the prices charged for professional, scientific and technical activities, information and communication, and real estate activities
  • service prices rose 0.6% between Quarter 4 2015 and Quarter 1 of 2016, compared with an increase of 0.5% between Quarters 3 and 4 of 2015
  • the main upward contribution to the quarterly rate of inflation came from professional, scientific and technical activities, and information and communication

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4. Annual inflation

The aggregate Services Producer Price Index (SPPI) rose by 1.4% in the year to Quarter 1 of 2016, up from an increase of 0.7% in the year to Quarter 4 of 2015. Of the 10 sections (as defined by the 2007 Standard Industrial Classification) that are combined to form the aggregate SPPI, 8 showed price increases.

The main upward contributions to the annual rate of the aggregate SPPI came from professional, scientific and technical activities, which increased 1.8% in the year to Quarter 1 of 2016, up from an increase of 1.3% in the year to Quarter 4 of 2015. Information and communication, and real estate activities also had notable contributions to the increase of the aggregate in the year to Quarter 1 of 2016, increasing by 2.5% and 3.8%, respectively. The only section to show a decrease was water supply, sewerage and waste management services where prices fell by 6.0% in the year to Quarter 1 of 2016, compared with a decrease of 9.4% in the year to Quarter 4 of 2015 (Table B and Figure B).

Price increases for professional, scientific and technical activities, information and communication, and real estate activities, provided the main contributions to the rise in the aggregate SPPI in the year to Quarter 1 of 2016.

Professional, scientific and technical activities prices increased by 1.8% in the year to Quarter 1 of 2016. Prices rose in all indices within this section, but the largest contribution to the rise was seen in business management and consultancy. Business management and consultancy prices increased by 3.1% in the year to Quarter 1 of 2016, compared with an increase of 0.7% in the year to Quarter 4 of 2015. This rise is mainly a result of companies increasing their charges for providing management consultancy services.

Information and communication prices increased 2.5% in the year to Quarter 1 of 2016. This increase was mainly due to computer software prices which increased by 2.5% in the year to Quarter 1 of 2016, from an increase of 0.5% in the year to Quarter 4 of 2015. This increase was due to a rise in the prices for maintenance and support of software systems and applications.

Real estate activities continued to show increases in the year to Quarter 1 of 2016 with prices rising by 3.8%. Increases in real estate agency prices have been the main contribution to the increase. Real estate agency prices increased 7.3% in the year to Quarter 1 of 2016, compared with an increase of 7.1% in the year to Quarter 4 of 2015. There have been increases in the prices of real estate activities throughout the UK.

Water supply, sewerage and waste management services was the only section within the aggregate SPPI to experience a decrease. Prices fell 6.0% in the year to Quarter 1 of 2016, compared with a fall of 9.4% in the year to Quarter 4 of 2015. This decrease was largely as a result of the fall in prices for sorted recovered materials services, where prices fell 28.1% in the year to Quarter 1 of 2016. Metal prices have shown a downward trend since 2011 with many metal market prices ending 2015 at low levels. This may be linked to a reduction in growth in the Chinese economy. This reduced demand may have contributed to the fall in the price of metals, including the scrap metals that are processed by contributors to SPPI (Figure C).

The aggregate SPPI increased 1.4% in the year to Quarter 1 of 2016, compared with an increase of 0.7% in the year to Quarter 4 of 2015. Figure D shows how the SPPI sections have contributed towards this 0.7 percentage point change. The main contribution to the change came from increasing prices for information and communication, and professional, scientific and technical services.

Examining inflation for each of the sections that contribute to 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 2012 and the annual rates of inflation for the 2 most recent quarters. The 10 sections were split evenly between those which saw an increase in inflation relative to the last quarter and those which experienced a fall. There was a rise in the aggregate inflation rate over this period.

One notable difference between each section is the range of inflation rates that have been experienced since 2012. Education, accommodation and food, real estate activities, and water supply, sewerage, and waste management 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. Vehicle repair and maintenance has not experienced inflation lower than 1.6% at any point in the past 5 years, while administrative and support services have not experienced inflation higher than 1.4%.

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5. Quarterly inflation

Prices received for the services included in the aggregate Services Producer Price Index (SPPI) rose 0.6% between Quarter 4 of 2015 and Quarter 1 of 2016, compared with an increase of 0.5% between Quarters 3 and 4 of 2015. Of the 10 sections that make up the aggregate SPPI, 6 sections showed increases in prices between Quarter 4 of 2015 and Quarter 1 of 2016.

The largest increases in the quarterly rate came from information and communication, and professional, scientific and technical activities, which increased by 1.4% and 1.1%, respectively between Quarter 4 of 2015 and Quarter 1 of 2016. The remaining increases were small, ranging from 0.1% to 0.7% (Table C and Figure F).

Professional, scientific and technical activities showed the largest contribution to the SPPI aggregate rate between Quarter 4 of 2015 and Quarter 1 of 2016 with prices rising by 1.1%, compared with an increase of 0.6% between Quarters 3 and 4 of 2015. The main contributions to this increase were from business and management consultancy, and accountancy prices, which increased by 2.8% and 2.2%, respectively, between Quarter 4 of 2015 and Quarter 1 of 2016. The movement in business and management consultancy was driven by marketing management consultancy and strategic management consultancy services. The increase in accountancy prices was driven by audit and assurance services.

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6. Economic context

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 labour 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, a change in the wage structure of the workforce can have an important impact on the SPPI. It is expected that the price charged for services should move in a similar way to the wages received by the UK workforce. Figure G shows 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.

Figure G shows the growth rates of both wages and services prices slowed considerably during 2008 and 2009, with services inflation falling from an average of 3.5% in 2008 to -0.8% in 2009, while growth in services wages slowed from 3.9% to 1.8% on average during the same period. Following the downturn, services prices and wages have followed similar trends, diverging slightly during 2015, as wages grew faster than services prices from the end of 2014. Looking at the most recent data, earnings have continued to grow faster than services producer prices, with services wages growing by 1.8% in Quarter 1 2016, compared to services prices, which had grown by 1.4% over the same period.

Although labour costs and therefore wage growth, is a significant factor determining services output prices, competitive pressures will have some bearing on the extent to which labour costs can be passed through to service delivery prices. As wage growth has picked up during 2014 and 2015, on-going competitive pressures in the services market may have limited the extent to which businesses can pass on those increasing labour costs.

The rise in service sector wage growth reflects some wider tightening in the UK labour market. Following strong employment growth over the past 2 years, the unemployment rate among those aged 16 and above remained at 5.1% in the 3 months to March 2016, broadly at its pre-downturn average (2000 to 2007). The employment rate rose further to 74.2% in the 3 months to March 2016 for those aged between 16 and 64, which is the highest rate since comparable records began.

In parallel with the fall in the unemployment rate, labour demand as measured by the number of vacancies has been relatively strong. The number of unemployed people per vacancy has fallen quite considerably since 2011, from 5.8 in the 3 months to December 2011 to 2.2 in the 3 months to March 2016, indicating that there are fewer unemployed workers for each vacancy. In relation to the services industry, the number of vacancies has been rising since mid-2012 and increased by 3.0% in the 3 months to March 2016 compared with a year earlier.

While the tightening labour market may be exerting upward pressure on wages, the productivity of labour also influences wage growth. Improvements in productivity creates capacity for output to rise faster than the corresponding rise in inputs, thereby allowing firms to produce more output per unit of labour employed. Productivity growth allows for output prices to rise more gradually, all else being equal. Unit labour costs – which measures the average cost of labour per unit of output – increased by 0.4% in Quarter 4 2015 (October to December), compared with a 0.5% increase in the previous quarter. This would indicate that labour costs continue to exert upward pressure on services prices.

While there are a number of factors affecting services prices, the demand for goods and services in the UK economy could also have an impact on services prices. The latest estimate has shown GDP increasing by 0.4% in Quarter 1 2016, compared with 0.6% in the previous quarter. Much of this growth has been concentrated in the services industry, with output increasing by 0.6%, albeit much more slowly compared with the previous quarter.

Comparison with Consumer Price 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 Price 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 to 2009, 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 2.3% in Quarter 4 of 2009. 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 and 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.

International comparison

All countries within the European Union are required to produce a measure of producer price inflation for the services 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 4 of 2010.

The UK and Sweden recorded largely stable service producer price indices, growing by 0.1% and 1.1% respectively over the total period, whereas Austrian prices increased more rapidly. These experiences contrast with France and Spain, where SPPI inflation had been negative until Quarter 4 of 2015 and Quarter 1 of 2015 respectively.

In recent quarters the range of inflation rates experienced by Spain, France, Austria, Sweden and the UK has narrowed, as the countries with the lowest inflation rates (France and Spain) saw an increase, and the country with the highest rate (Austria) saw a decrease in inflation, with Austria’s inflation rate in Quarter 3 of 2015 at the lowest level seen since 2010. Spain saw negative SPPI inflation from Quarter 3 of 2011 and Quarter 1 of 2015, however, the last 3 quarters have seen positive SPPI inflation, with the Spanish inflation rate at the highest since 2011.

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7. Net sector aggregate

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 2016, movements in the net sector aggregate SPPI were:

  • annual inflation rose 1.3%, up from 0.7% in Quarter 4 of 2015
  • between Quarter 4 of 2015 and Quarter 1 of 2016, quarterly inflation stood at 0.7%, compared with 0.4% between Quarters 3 and 4 of 2015

Generally, the movements of the net sector aggregate SPPI are similar to those of the gross sector indices (Figure J).

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8 .Background notes

  1. How are we doing?

    We are constantly seeking to improve this release and welcome your feedback to help us achieve this. If you have any comments on the format, layout or content of this release please let us know. We would also be interested in knowing how you use these data to inform your work. Please email us: sppi@ons.gov.uk

  2. Analysis of Service Producer Price Indices using standard errors

    To help you quantify the uncertainty around the estimates of service sector inflation, we plan to calculate standard errors for SPPI. We will present the results of our analysis in an article published as soon as possible.

  3. Coverage of SPPI

    The SPPI is a measure of inflation for the UK service sector; however prices are not collected from Northern Ireland for any of the service industries which are collected as part of the quarterly survey. This is because the Statistics of Trade Act which makes the SPPI survey mandatory does not extend to Northern Ireland. The omission of prices from Northern Ireland means that the SPPI makes the assumption that prices received by companies in Northern Ireland change at the same rate as prices in the rest of the UK.

  4. Re-assessment by the UK Statistics Authority

    In 2013 the SPPI underwent a routine re-assessment by the UK Statistics Authority against the Code of Practice for Official Statistics. The final SPPI assessment report is now available.

  5. Finding SPPI data

    All of the data included in this statistical bulletin, alongside data for the full range of SPPIs, is available in the associated Services Producer Price Index (SPPI) dataset or can be downloaded from the time series dataset for SPPI. Each SPPI has 2 unique identifiers: a 10-digit index number which relates to the standard industrial classification code appropriate to the index, and a 4-character alpha-numeric code which can be used to find series when using the time series dataset for SPPI. SPPI records which show higher, lower or equal to movements, are also available to view or download.

  6. Article about rebasing the PPI and SPPI onto 2010=100

    As previously announced, we have been taking forward the rebasing of PPI and SPPI onto a 2010=100 basis. SPPI has been published on a 2010=100 basis, which was first released on 26 February 2014. A parallel run has been conducted to compare 2010=100 index values with 2005=100, analysing trends in the process. This parallel run will form an assessment of the impact of rebasing. An article services producer price index rebasing (2010=100) describing the results of this assessment is available on our website. If you have any questions or queries regarding the impact of rebasing on SPPI data, please contact SPPI.

  7. Quality and methods

    A quality and methodology information (QMI) report is available for the SPPI which describes how the statistics presented in this statistical bulletin are produced and provides information on the quality of the statistics. Detailed information on the methods used to compile the SPPI is available in the SPPI manual.

  8. Guidance for users

    The SPPI is calculated on a “business to business” basis. This means that only transactions between UK businesses and other UK businesses or government are included. Sales made to customers outside of the UK or to members of the public are excluded.

    Index numbers shown in this statistical bulletin are on a gross sector basis unless otherwise stated. This means that they include transactions between UK service sector businesses and all other UK businesses and government.

    Indices relate to average prices per quarter. The full effect of a price change occurring within a quarter will only be reflected in the index for the following quarter. All index numbers exclude VAT and are not seasonally adjusted. Since SPPIs exclude VAT, they are not affected by the increase in the standard rate of VAT to 20% from 4 January 2011.

  9. Definitions

    Gross and net sector series - All figures presented in this statistical bulletin are calculated on a gross sector basis unless otherwise stated.

    Gross sector output (GSO) series - calculated using weights based on sales to UK businesses and government from all transactions within the UK. This index reflects the “service sector” inflation experienced by all UK businesses.

    Net sector output (NSO) series - calculated using weights based on sales to UK businesses and government outside of the service sector. For example, sales of legal services to a UK manufacturing company would be included, but sales to an accountancy company (another service provider) would be excluded. This index gives a measure of inflation that is specific to non-service sector businesses.

    GSO weights - for most industries, sales from the Services Turnover Survey (STS) are used to determine their weight into the aggregate SPPI. Where STS data is unavailable, data from the Annual Business Survey is used as a proxy. In order to make the ABS data more comparable to the STS data, an adjustment factor is applied to remove sales attributed to non-service provision. These sales values are then used to calculate the industry weights.

    NSO weights - net sector weights are calculated by taking the gross sector sales data and adjusting them to represent only sales to businesses outside the service sector. This adjustment is made using data from the National Accounts supply and use tables. These tables allow for the calculation of a ratio for each industry that approximates the proportion of sales to non-service sector businesses. This ratio is applied to the gross sector sales to give an approximation of the net sector sales. The resulting calculated sales are then used to weight the industries into the net sector aggregate SPPI.

    Reporting periods - Throughout this release Quarter 1 refers to January to March, Quarter 2 refers to April to June, Quarter 3 refers to July to September and Quarter 4 refers to October to December.

  10. Data sources

    The SPPI is compiled using the results of a mandatory survey carried out under the Statistics of Trade Act (1947). To keep the burden on respondents to a minimum, alternative data sources are used to compile the indices wherever possible. Currently 6 SPPIs are compiled using external data sources, these data sources are:

    • property rental payments - Investment Property Databank (IPD)
    • financial Intermediation (Banks) - Bank of England (BoE)
  11. SPPI coverage

    We do not 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 from the service sector. Similarly, the indices published at section level do not provide full coverage and are the best estimate that can be made of those particular service activities using the data available. As resources allow, we 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 our best estimate of overall inflation to UK businesses from the service sector. The fact that coverage may change over time should be considered by users when deciding which indices best meet their needs.

  12. Revisions

    SPPI follows our policy for revisions and corrections and will show significant revisions but suppress minor changes to avoid unnecessary inconvenience to users. Indices for the most recent 2 quarters are regarded as provisional and may be revised as later data become available.

    For this statistical bulletin, Table 1R in the SPPI dataset highlights revisions to movements in price indices previously published in last quarter's statistical bulletin.

  13. European comparability

    The UK is required to produce a number of the SPPIs included in this statistical bulletin under the short-term statistics regulation. As a result, all EU countries must publish equivalent series on a comparable basis. Further information about SPPI at an EU level, and access to data for all EU countries is available on the Eurostat website.

  14. Publication policy

    The complete run of data in the tables of this bulletin are also available to view and download in other electronic formats free of charge using our time series explorer (if you want the data associated with this bulletin click into Download data in this release option). You can download the complete release in a choice of zipped formats or view and download your own selections of individual series.

  15. Code of Practice

    National Statistics are produced to high professional standards set out in the Code of Practice for Official Statistics. They undergo regular quality assurance reviews to ensure that they meet customer needs. They are produced free from any political interference.

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9 . Methodology

Contact details for this Statistical bulletin

James Wells
sppi@ons.gov.uk
Telephone: +44 (0)1633 455582