Input and Output Price Inflation

In this study video we look at the difference between input and output price inflation - both lead indicators of possible changes in consumer price inflation.

What is input price inflation?

Input price inflation measures changes in the prices of materials and fuels bought by UK manufacturers for processing. It might include the cost of oil and gas used in production, or prices of ingredients used in food manufacturing.

What is output price inflation?

Output price inflation measures changes in the prices of products as they “leave the factory gate” before being sent to wholesalers and retailers. Producer prices include the profit margin that businesses make on their products.

What factors influence whether higher input prices feed through to increased output prices?

• It is easier to pass on higher costs when coefficient of PED is low
  • Product might be seen as a necessity
  • Strong customer loyalty / few close substitutes available
• It is easier for a business to pass on increased costs when a firm has substantial market power (this links to the previous point)
• Decision may depend on what other producers are choosing to do
• Manufacturers may find cost savings elsewhere (such as lower wages)
• Producers may feel rising input costs are transitory & can be absorbed

A good applied example are the cost increases facing the processed chicken industry in the UK in the Autumn of 2021.The processed chicken industry in the UK is facing huge cost pressures leading to higher prices:

Input costs include:

1. Rising feed costs for poultry
2. Increased prices for supplements
3. Higher veterinary costs
4. Acute HGV driver shortages and factory worker shortages have caused wages to rise by 15-20% in one year
5. Energy and carbon dioxide costs rising more than 500% since 2020
6. Packaging costs up 20% in six months

Exam gold

Input price and output price inflation can be seen as an important lead indicator of what might happen to the overall inflation rate in the near future. Fears over accelerating inflation in the UK are based on what is happening to costs and prices throughout the UK’s supply chain.