The Consumer Price Index (CPI) measure of inflation rose to 3% in September, up from 2.9% in August.
The rise was attributed to the fall in the value of Sterling, with the prices of most goods increasing and a rebound in oil prices.
Interest rates remain at the historical low of 0.25%. Forward guidance from the Bank of England hinted at potential increases in rates over the coming months. However, several economists have speculated whether the mechanism of balancing inflation with interest rates is working, citing Japan’s near 20 years of low interest rates as a precedent.
The Retail Price Index (RPI) alternative measure increased to 3.9%, up from 3.6% in July, the highest level since 2011, when it was 5%. This measure illustrates the potential reduction in consumer spending as average weekly earnings remain below inflation at 2.2%, with price rises outstripping wage growth. The potential slowdown in consumer spending will inevitably reduce domestic demand and have a knock on effect to construction output.
London and South East - Two Speed Market
Contractors with capability to complete large complex projects, often referred to as Tier 1s, are still experiencing busy workloads on the tail of demand from the last boom. Also due to their nature, there are a limited number of Tier 1 contractors who have tended to favour two-stage negotiation to secure work. Pricing levels for Tier 1 contractors on large complex projects have therefore remained buoyant.
By contrast those contractors who operate on projects below £100million value, referred to as Tier 2 and Tier 3 contractors, are facing more competition for a slowing market workload.
We have recorded a shift in attitude to single-stage competitive tenders and lump sum bidding as order books for both Tier 2 and 3 contractors look to be filled.
Hotspots remain in the high end residential sector and busy locations such as Cambridge.
Our Tender Price Forecast for 2018 and 2019 reflects a slowing of demand in the market as experienced by the majority of the supply chain outside mega value projects. We see the reduced demand in 2019 forcing a reduction in tender pricing to secure workload.