Developer Notes

This is actually working correctly in 4.9, 4.10, 4.12 and 4.13. It was broken in 4.11 so this is an incorrect regression. See below for the information on intended behaviour, but a material instance used as a blendable will treat the base material as the 'default' state and intentionally blend in from that when entering a post process volume.
UMaterialInterface::OverrideBlendableSettings() comments:
// If the initial node is faded in partly we add the base material (it's assumed to be the neutral state, see docs)
// and then blend in the material instance (it it's the base there is no need for that)
https://docs.unrealengine.com/latest/INT/Engine/Rendering/PostProcessEffects/PostProcessMaterials/
All material instances properties are blended, no matter if the property checkbox is checked or not (in that case it blends the property from the parent).

Description

When applying a Post Process Material Instance as a blendable element in a Post Process Volume with the blend radius set higher than 0, the post process will blend the Master Material's inputs with the Material Instance applied.

REGRESSION?
Yes, this issue doesn't occur in the binary of 4.11.2 - 2946394

Steps to Reproduce
  1. Open the editor for any project
  2. Create a material and set material domain to Post Process
  3. Create a vector parameter node
  4. Plug it into emissive color
  5. Create Material Instance of the material you just made
  6. Open the new instance you just created and adjust the color on the vector parameter so that it's different from the master material
  7. Create postprocess volume
  8. Apply the material instance you created earlier as blendable
  9. Set Blend radius to 300
  10. In the level view port move the camera slowly towards the volume

RESULT: At the edge of the specified blend radius the master material's color overrides the material instances' color. (See attached screenshots)

EXPECTED: Only the material instances color blends and not the master material's color.

Have Comments or More Details?

There's no existing public thread on this issue, so head over to Questions & Answers just mention UE-32871 in the post.

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Won't Fix
ComponentUE - Graphics Features
Affects Versions4.12.4
Target Fix4.13
CreatedJul 6, 2016
ResolvedAug 10, 2016
UpdatedApr 27, 2018