1. Introduction

1.1 Spotlight on Quality: Assuring Confidence in Economic Statistics programme

1.1.1 In our role as an independent regulator, we carry out assessments of official statistics by reviewing their trustworthiness, quality and value. In the context of the UK’s departure from the EU, with Eurostat no longer providing external assurance of the UK’s economic statistics, we recognise that key stakeholders, and the wider public, need additional assurance specifically on the quality and independence of UK economic statistics.

1.1.2 As part of our Spotlight on Quality: Assuring Confidence in Economic Statistics programme, we are now delivering a series of quality-focused assessments to provide this enhanced assurance. Following discussions with stakeholders, we developed an initial assessment framework that focuses more intensively on the quality of economic statistics. This is based on the Code of Practice for Statistics, with elements from other assessment frameworks, such as the International Monetary Fund’s (IMF) Data Quality Assessment Framework. These quality-focused assessments examine whether the statistics are produced using suitable data sources, appropriate methods, and transparent quality assurance; whether the statistics are internationally comparable; and whether the statistics meet the quality needs of users and are not materially misleading.

1.1.3 The assessment framework will be developed further as the programme progresses. Our website contains more information about the current status of the programme.

1.2 Producer price inflation statistics

1.2.1 Producer Price Indices (PPIs), produced by the Office for National Statistics (ONS), measure changes in the prices of goods bought and sold primarily by UK manufacturers including price indices of materials and fuels purchased (input prices) and factory gate prices (output prices)[1].

1.2.2 ONS publishes monthly, quarterly and annual PPIs. The indices are split into the Producer Price Index (PPI), Export Price Index (EPI) and Import Price Index (IPI). Two types of data are used in the calculation of the PPI: prices quoted by manufacturers for their products and the sales values that are used to provide a weight for the product in the index.

1.2.3 PPI has one of the longest-running time series of any economic statistic. The PPI time series goes back to 1957 with figures for manufactured products for the domestic market excluding duty. Aggregate PPI for crude petroleum is available from 1974 and inputs into manufacturing available from 1985.

1.2.3 A related set of statistics, the quarterly Services Producer Price Indices (SPPI), was not reviewed as part of this assessment.

1.3 Uses of PPI

1.3.1 PPIs have three main uses, which are reflected in the International Monetary Fund (IMF) PPI Manual: as a deflator of other economic series, including GDP (their primary use); as an economic indicator; and as a basis for indexing prices in contracts.

• As a deflator of other economic series – PPIs are used to adjust other economic time series for price changes, including estimates of Gross Domestic Product (GDP). They are used in the production approach to GDP for elements of both intermediate consumption and output as part of the double deflation framework[2] introduced by ONS in 2021. They are also used extensively in ONS’s short-term GDP estimates. ONS’s National Accounts and trade statistics teams use them widely and are the primary users of the statistics.
• As an economic indicator – PPIs capture price movements prior to the wholesale and retail margins and may therefore be an indicator of subsequent price changes for consumers, the latter of which are measured through the Consumer Price Index (CPI). City economists and HM Treasury use PPIs as an early indicator of inflationary pressures in the economy and the Bank of England uses them as part of monetary policy development.
• As the basis for indexing prices in contracts – PPI data are commonly used in indexing purchase and sales contracts, which typically specify amounts of money to be paid at some point in the future. UK government departments are starting to link contracts to PPIs. For example, the Ministry of Defence links defence contracts to the relevant indices to ensure the cost of the contracts tracks changes in prices. Indexing contracts to PPI reduces the costs incurred by government departments as the government department and contractor are assured that the contract reflects the current economic environment[3]

1.3.2 PPI data are an invaluable upstream indicator for the UK Government’s Situation Centre (SitCen) which supports the Cabinet Office Briefing Room (COBR) with data and analysis used as part of decision making. The data were recently used to understand the impact of the Russian invasion of Ukraine as well as anticipating price rises of key commodities that are contributing to the rising cost of living. Additionally, EPI and IPI data are being increasingly used to understand the post EU-exit economy.

1.4 Data sources

1.4.1 PPIs are compiled using survey and administrative data from a range of sources. Most price data are collected using three statutory monthly surveys, which ask manufacturers to provide a price for the product(s) that they regularly produce. The monthly survey for PPI is the largest and has a target sample of 6,750 price quotations from approximately 5,000 UK manufacturers. The monthly EPI and IPI surveys each have a target sample of approximately 3,600 price quotations from approximately 1,900 UK manufacturing exporters and approximately 1,500 importers. ONS’s Business Data Operations Division (BDOD) (the ‘data collection team’) is responsible for conducting the statutory surveys.

1.4.2 The PPI survey uses a stratified sample design based on revenue, number of manufacturers and the volatility of prices. The sample is chosen from manufacturers that have been selected for ONS’s annual UK Manufacturers’ Sales by Product (PRODCOM) survey[4]. The sampling units are respondent-product pairs, created by matching respondents to the products they manufacture. For example, if one respondent makes three different products then three respondent-product pairs are created. The sample used to be updated annually and was selected from the previous year’s PRODCOM returns, but this annual updating was paused in 2019 to facilitate the introduction of the annual chain-linking methodology (discussed below). Updating the PPI sample has yet to resume due to an ongoing review of the methods to be used.

1.4.3 The EPI and IPI samples are sourced from HM Revenue and Customs (HMRC), which records exports and imports by VAT-registered trader. ONS stratifies the sample to improve the efficiency of the sample in calculating product weights.

1.4.4 The collection of prices is via a pre-printed form containing the most recent details provided to ONS. Respondents also have the option to request a PDF form. Forms are sent to manufacturers at the beginning of each month and ask manufacturers to check if the specification for the products they are providing are up to date and representative. Manufacturers then return their latest prices and any future prices if they know they will not change for the next three months. Alternatively, manufacturers can return prices via telephone data entry (TDE) (for the PPI survey only).

1.4.5 Data are also sourced from administrative systems and survey data provided by third parties, for example, agricultural price indices from the Department for Environment, Food and Rural Affairs (Defra) and energy price indices from the Department for Energy Security and Net Zero (DESNZ). In addition to other government departments and organisations, prices are collected from various published sources including published magazines or directly from the internet and used in the index in the same way as survey prices. Examples include the Financial Times for precious metals and non-ferrous metals prices, Smithfield Market for the prices of meat products and the International Coffee Organisation for the prices of imported coffee beans. A full list of administrative sources can be found in Annex A.

1.5 Data processing and systems

1.5.1 ONS uses two databases or systems to produce the PPIs. Data from all survey and administrative sources are collected and collated in an Ingres relational database where price relatives are calculated and processed. Index calculation and aggregation is carried out in ONS’s Data Access Platform (DAP). Until 2020, this was done in Ingres. The primary purpose for moving the index aggregation from Ingres to DAP was to allow ONS to implement the annual chain-linking methodology for PPI (see 2.5.5). DAP has also provided the business prices team with the ability to build its own analytical tools so that it can interrogate and understand PPI data more rapidly.

1.5.2 The PPI system in Ingres is coded in-house. The database was established in the 1980s and since then has been expanded and added to but not had a full redesign. Over time the work and maintenance of PPI has become more complex as it has aimed to meet growing user demands of other ONS teams, including the National Accounts and trade statistics teams that use PPIs to deflate other economic series. ONS is not investing resources in improving Ingres systems; the focus is now on reducing reliance on ‘legacy systems’ and migrating processes on to more-sustainable platforms.

[1] The factory gate price is the amount received by UK manufacturers 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.

[2] Double deflation separately deflates output and intermediate consumption to arrive at the production measure of Gross Value Added (GVA) in chained volume measures (CVMs).

[3] By indexing the contract payments to an index, contractors are assured that their future compensation accurately reflects future costs incurred. Therefore, the contractor reduces the risk premium that they charge to the government.

[4] ONS’s PRODCOM survey measures sales of products by UK manufacturers and reflects actual transactions taking place in the economy.