The Data That Says Building Costs Are Going Even Higher

Inflation has been a problem in the construction sector since the coronavirus pandemic began. Global supplies of everything from mastic sealants to plaster to window units have see-sawed, putting enormous pressure on building costs.

However, the upward pressure caused by rising supply costs will fade into the background as the more serious problem of wage inflation rears its head and labour costs rise.

Construction industry vacancies have reached their highest point for more than 20 years, prompting renewed fears that build-cost inflation will accelerate.

The return home of migrant EU workers has been suggested as a cause of so many unfilled posts. Filling them will inevitably involve high wage costs.

Data from the Office for National Statistics shows the vacancy level in the construction sector reached 35,000 in spring 2021. This exceeded the previous high in autumn 2017 when 32,000 construction vacancies were registered.

The previous peak was in summer 2001 when vacancies reached 31,000.

Construction inflation is already at a 24-year high.

Official figures show monthly surges of up to 7.8%, but price growth is much higher for some items, with reports of surges of up to 30% in a random basket of materials: Plywood, gravel and particle board along with steel and timber are the focus of anxiety today.

The shock to the construction industry is deeper because whilst construction input inflation was running far above consumer/retail inflation until the pandemic, construction inflation seemed to be under control.

As 2020 dawned commercial buildings inflation was expected to climb down from a 5% high in both 2018 and 2019, and was expected to land at 3.8% by 2022.

Residential construction inflation in 2019 was a modest 3.6%, and expected to hover at around that level, according to the Construction Analytics forecast.

Shortages of labour would normally push up prices, but a surge in construction output in May means an exaggerated impact on a stressed market.

After reaching a seven-year high in April, construction output surged again in May, with output growth at its strongest level since September 2014.

The IHS Markit/CIPS UK Construction PMI Total Activity Index has reflected growth in 10 of the past 11 months, with the grim lockdown month of  January 2021 the only exception.