The after-effects of the Covid pandemic and war in Ukraine have pushed consumer price inflation up to levels not seen in forty years. But it is not only consumers that are facing rising costs, businesses are too and these pressures often impact prices for the rest of us. Here, Brogan Taylor and Ryan Powell explain how we measure business prices, why these data are important and what they show.
With prices of many everyday items increasing, consumer inflation has been a central focus of the news agenda for many months. Often, the reason prices rise for consumers is because the costs facing businesses are also going up, and end up being passed on. Therefore, it’s important to understand the trends that businesses are seeing in order to understand what consumers are likely to see in the future.
How ONS measures business prices
We have three main metrics for measuring how price rises are affecting businesses, which we produce using a detailed survey of thousands of businesses:
Input price inflation: This looks at the cost of raw materials such as crude oil, wood and steel used in the manufacturing sector to produce components and final products. Often, as we have seen with the recent rise in crude oil, input prices are a ‘leading indictor’ with price rises here filtering through to other industries later. Overall, the cost of raw materials is almost a fifth higher than a year ago, which is the biggest annual rise ever seen in our data.
Output price inflation: This is often known colloquially as ‘factory gate inflation’ as it measures the prices of components and finished products as they leave the factory gate. Sometimes the rise in factory gate prices is driven by rising raw material costs, but at other times, such as the recent global shortage in microchips due to Far Eastern factory shutdowns during the pandemic, the drivers of this type of inflation can come from elsewhere. As with the microchips example, rises in the cost of finished components can drive rises in inflation in other industries that rely on them, in this case the car industry. Overall, these factory gate prices rose 14% in the year to April, four times higher than their annual growth rate last April.
Services inflation: As well as our long-standing figures on inflation faced in the manufacturing industries, over the last decade we have been developing new metrics looking at price rises in the services sector, which makes up over three quarters of the UK economy. These cover aspects such as distribution, call centres and other significant areas of the economy. For example, logistics costs are currently rising by nearly 8%, again the highest figure on record.
Why are they useful?
These metrics tell us important information about how price rises are affecting the UK’s industries, allowing policy makers to intervene, if necessary, but they also provide important information allowing us to take ‘cash’ measures of the economy and translate these into ‘real’ estimates. If GDP in cash terms rises simply because the cost of making things has gone up, then the economy hasn’t truly grown. By using our data on businesses prices, we are able to see through these price rises and estimate whether the amount of goods and services produced and delivered in the economy has truly grown.
Tomorrow we’ll be publishing updated input and output prices for May, which we’re sure will be closely watched for any changes. But the job won’t stop there, here at the ONS we’ll continue to monitor how the costs facing businesses are rising, and how this might filter through to consumers.