Civil Engineering Reference
In-Depth Information
and cover their costs; when the market is buoyant, tender prices will increase as
contractors take advantage of the opportunity to more than cover their costs.
As with retail price indices, it is important to make sure that in compiling
construction indices the prices being recorded are for comparable items. Are apples
being compared with apples, not with oranges? In other words are the baskets
being used for comparisons consistent? The physical and functional qualities of the
structures being priced must be broadly similar to make a valid index.
Key Points 14.1
❍
Inflation is a persistent increase in prices, and controlling it is a major
priority for all governments.
❍
Many modern contracts are index linked to protect the economically active
and those on fixed incomes from the effects of inflation.
❍
Price indices compare the current cost (the cost today) with the cost of the
same item(s) in a base year.
❍
The RPI and the CPI are both used as measures of the general inflation rate
in the UK.
❍
There are several specialised price indices, and examples that apply to the
construction sector include the Davis Langdon construction cost indices,
the building cost index and the tender price index.
THE CAUSES OF INFLATION
Although there are many different explanations for inflation, we shall just consider
the two main causes. According to these two explanations, inflation either occurs
because an increase in demand pulls up prices or because an increase in the cost of
production pushes up the price of final products.
Demand-pull Inflation
As we have already explained in
Chapter 13
(and reviewed in
Key Points 13.4
and
13.5
), when aggregate demand in an economy is rising inflation may occur. The
severity of the problem depends on how near the economy is to its full capacity
level (that is, to full employment). As
Figure 13.3
(see page 231) illustrates, there is
during any specific time period a fixed output rate in the economy and if demand
increases beyond that point the only way businesses can respond is by increasing
their prices. Indeed, beyond a point of full capacity no more output is physically
possible and the pressures of excess demand can only be countered by price
increases. To put it in other words, when total demand in the economy is rising and
the capacity available to produce goods is limited,
demand-pull inflation
may occur.
Cost-push Inflation
Prices also rise when the economy is nowhere near full employment. The UK
economy experienced inflation during a recessionary period in the mid-1970s and
