Captain’s Blog – Inflation

We have been hearing for months if not years now about inflation being just around the corner. The classic definition is ‘too much money chasing too few goods’ which pretty much sums up where we are now. The Government’s Quantitative Easing programme essentially meant pumping money into the economy without any corresponding increase in output, so there’s the ‘too much money part’. COVID and Brexit joined forces to restrict the supply of materials and labour so that brings in the ‘too few goods’ part. All we needed was a push in demand to create the perfect storm and that’s where the Government stepped in again by trying to build its way out of the pandemic with the implementation of major infrastructure projects, funding for secondary and tertiary education building and boosting housing via various help to buy schemes. As if that wasn’t enough our preferences are shifting to on-line shopping, so the demand for logistics buildings rockets to bring a further boost in demand for all things construction. The result is serious double digit inflation in our industry with often crippling materials shortages. Some developments are already underway so the pain there will be shared between developer and contractor depending on who was cleverest with the contract but other schemes will be paused or cancelled altogether whilst the situation tries to correct itself.

We suspect things will change. Firstly inflation is already leading to higher interest rates which will feed through into mortgage rates which in turn will suppress demand for new houses. Fuel prices will put a big hole in household budgets and the increased cost of the weekly shop will mean that people change their outlook and spending habits pretty quickly. That will dampen demand which should, all things being equal, help with inflation. The Government has also turned off the QE tap (and not before time some would argue). Meanwhile we hope that supply recovers from the post pandemic shock and materials become more plentiful. We should see suppliers start to compete more and abandon the wild increases that they have passed on whilst they could. We will also witness some positive changes in our industry through a more considered approach by developers and the design team. Faced with supply problems in steel and concrete Helios is now looking to build warehouses with timber beams which also has the advantage of being considerably more sustainable. More materials are being re-cycled including demolition waste which can replace quarried stone for foundations. We are looking afresh at basic design principles because we have to whereas previously we would have probably gone with tradition.

Hopefully we can collectively put a lid on inflation before it runs away with itself. The 7% nationally published rate is scary and well ahead of Governments 2% target (and most experts’ 4% forecast) and its worth remembering that as recently as 2020 it was 0.99% but it’s nowhere near the peaks of 1980 where we saw 17.99%. There are some encouraging signs. Timber prices in Europe are coming down slowly and supplies of some materials are improving. Fuel prices have hopefully peaked assuming there isn’t a major war and global shipping rates should move back towards normal. The next six months will be critical but we remain carefully optimistic. If we weren’t we wouldn’t be developers!