The input-output price gap: spotting a margin squeeze early

Your accounts will tell you about a margin squeeze months after it has started. The gap between what you pay for inputs and what you charge for outputs tells you much sooner, and you can read it from data you already hold.

The latest official figures show why this matters now. The ONS reports that input prices rose 6.1% in the year to August 2026, while factory gate prices rose 3.7%. That is a gap of about 2.4 percentage points. It is an economy-wide average, so it is a prompt to check your own numbers, not a measure of your business.

Why the accounts lag the squeeze

Average gross margin is a slow instrument. Three things delay it.

• Stock. If you bought materials three months ago at older prices, today's cost of sales still reflects them.
• Contracts. Fixed-price orders and supplier agreements keep both sides of the margin frozen for a while, then change at once.
• Averaging. A blended margin mixes products with rising costs and products with falling costs, so movements cancel out.

The result is a margin that looks acceptable until the stock turns over, at which point it drops in one or two months. By then the decisions that would have helped, on price, terms or range, are weeks late.

Reading the price gap

The idea is simple. For each main cost line, compare its 12-month change with the 12-month change in the price you charge for the products that use it.

The ONS bulletin published on 16 September 2026 shows how uneven the picture is. Input crude oil rose 26.7% over the year. Coke and refined petroleum products, the main oil-related output, rose 49.1%. In food manufacturing the picture is the opposite: domestic food input prices fell 2.2% and food product output prices fell 0.9%.

So one national gap hides very different positions. A packaging converter, a food producer and a metal fabricator can sit in the same average and face different squeezes. Your own gap, by product group, is the figure that matters.

What the survey evidence adds

Official indices are a month or more old, so it helps to compare them with survey data. The S&P Global UK Manufacturing PMI for September, 51.9, showed input cost inflation accelerating for the first time in four months, with higher prices for chemicals, electronics, energy and food, and rising transport costs. Selling prices have risen for ten straight months, and both input and output inflation were higher among SMEs than among larger producers.

Make UK's Q3 Manufacturing Outlook, published on 14 September, says rising employment, energy and other costs continue to put pressure on margins. Note that wages are part of the gap too. A material-only comparison will understate the squeeze if labour costs are moving as well.

Who the gap hurts most

A gap of a few points does not hurt every product equally. It hurts most where:

1. materials are a large share of cost, so a price move passes straight through;
2. you sell on fixed-price terms or long quotes, so you cannot adjust quickly;
3. the product already earns a thin margin, so there is little room to absorb it;
4. your customers can compare alternatives easily.

This is where margin by product matters. Take illustrative figures: a product with a 30% gross margin and materials at 50% of the selling price. If materials rise 6% and the price stays flat, the margin falls by three points to 27%, a tenth of the gross profit gone. A product with materials at 25% of price would lose one and a half points. The same input rise does twice the damage to the first product, and an average margin shows neither.

What to do with the result

Once you have found the one or two product groups with the widest gap, there are three levers.

• Price. Raise prices on the exposed group, not across the board. Our earlier piece on passing on UK cost rises covers how to build that plan.
• Terms. Shorten quote validity, add price-review clauses, or change minimum order values. Cost-to-serve shows how small orders and delivery terms add to the squeeze.
• Range. If a product cannot carry a price rise and earns little, decide whether to keep it. The long tail is often where this answer sits.

The next ONS producer price bulletin is due on 21 October at 07:00, and the Bank of England's next rate decision is on 5 November, after it held Bank Rate at 3.75% in September. Figures in this article will move with both, so treat them as a snapshot and update your comparison when the new data arrives.

What to check this month

• List your three largest material or cost lines and note the 12-month change in the price you pay for each.
• Note the 12-month change in your selling price for each product group that uses them.
• Mark the one or two groups where cost has risen furthest ahead of price.
• For those groups, check how much stock and how many open quotes are still priced at older costs.
• Decide on one change, to price, terms or range, and put a date on it.

If you would like a structured view of where your own margin is exposed, the Business Health Check gives an indication from a few company figures, with no need to share customer data.