Civil Engineering Reference
In-Depth Information
14
The Business Case:
Inflation and Expectations
In any government literature that aims to encourage sustainable construction, the
key argument is the business case. This makes sense, as the private firms - the
primary target for these government appeals - are first and foremost in business.
The bottom line means that companies have to earn enough to pay their bills.
Consequently, although the ultimate aim of the policy on sustainability is to create
a more socially and environmentally responsible construction industry, the business
case is seen as the way to drive this forward. The UK government Strategy for
Sustainable Construction made the point explicitly in its opening pages when it
stated that increasing profitability by using resources efficiently lies at the heart of
the case for sustainable construction (HM Government 2008: 5). This requires a
stable and competitive economy, run in line with the macroeconomic objectives set
out in
Chapter 12
(see
Key Points 12.1
).
At the heart of a stable and competitive economy lies a low inflation rate, and
an explicit aim of monetary policy is the control of inflation. If prices are continually
changing, entrepreneurs are hesitant to enter into contracts as they cannot work
out the long-run results of their investments. This is compounded by the problems
caused by changing interest rates and fluctuating foreign exchange rates, which often
accompany inflation. It is simply much easier to work within a stable economic
environment. Stability means that the costs and prices of any project or investment
can be estimated with greater certainty and transparency, allowing businesses to
plan with increasing confidence. Indeed, economists define the associated impacts
of inflation on business as
menu costs
. These costs arise due to the need to revise
existing contracts, new tenders and bids for work as inflation sets in. Obviously, as
inflation rates become higher and more volatile, menu costs get more demanding
and, in extreme circumstances, they might include costs associated with alterations
to vending machines, the costs of printing revised price lists, the time spent
renegotiating, and so on.
Inflation also affects those that are not economically active. If prices increase,
then those on fixed incomes such as pensioners, students and people on state
benefits suffer. In consequence, many aspects of economic activity are index-linked
to allow for inflation. For example, savings, business contracts and pensions can all
be adjusted in the light of inflation. All that is needed is a reliable price index.
INFLATION AND HOW IT IS MEASURED
Inflation is a
persistent
increase in the general price level.
The italicised word in the definition is important, as any increase in the price level must
be sustained to be categorised as an inflationary situation. Continuous annual price rises,
however, such as those experienced in the UK, are definitely categorised as
inflation
.
