What’s happening to prices?

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Today's data release on the Producer Price Index shows that input prices in the year to August rose at 2.8%, much slower than that seen in the year to July, which saw prices rise 5.1%.

Looking in more detail at which products are driving pressure on prices shows that all product groups bar one saw prices rise over the past year. The highest upwards pressure on input prices was from fuel and food materials.

Input prices generally rising% change in the 12 months to August 2013Source: National Statistics

Imported metals were the only group that saw prices fall over the past year. The metals sectors have struggled through the recession and the challenges facing the sector have fed through into prices. This is not entirely surprising as some input prices, such as the steel price, have been falling.

The steel price – shown on the graph below – has fallen significantly over the past year and there are a number of factors at play. On one hand, demand from China is heavily influencing the prices of iron ore and coking coal, which is a primary input in steel. The weaker growth that we have been seeing in China may continue to reduce pressure on input prices as the Chinese government seeks to rebalance their economy. Also, demand from key industries in Europe is another important driver of the steel price and the biggest steel-consuming sectors – automotive, construction and mechanical engineering – saw output fall all these sectors in 2012 and early 2013.

However, if recent improvements in business sentiment and credit conditions continue, a modest recovery could boost demand and, as a result, the steel price.

Steel Price has been falling over the past yearSteel Price Index, May 2013=100Source:

How are manufacturers being affected? In our most recent Economic Outlook, manufacturers reported little change on balance to their domestic and export prices. This stability of their prices along with the falling input prices led to margins improving to their highest level in two years.

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