What does negative inflation mean for construction?

Today’s news that inflation turned negative in April has made headlines and prompted debate on how this actually impacts on the economy - and therefore the construction sector?

The first response to this is to answer the question of why deflation is bad for an economy. Recent experience of deflation in western economies shows that it affects the natural order because the value of real money actually increases over time. This benefits creditors and harms debtors as it means the real value of debt increases - creating disincentives for firms to make investments in the future. 

Other reasons for economists disliking deflation are that it weighs negatively on future expectations of economic performance. For example, wage growth becomes suppressed harming overall output and disposable income for employees. These impacts would of course be relevant for the construction sector as well as the economy as a whole.

At the moment the cause of negative inflation is largely down to falls in the cost of transport (mainly due to the falling oil price) and the fall in food prices. The impact of the low oil price is therefore likely to disappear from the figures in the coming months

So should the construction sector be worried about today’s figures? At the moment the cause of negative inflation is largely down to falls in the cost of transport (mainly due to the falling oil price) and the fall in food prices. The impact of the low oil price is therefore likely to disappear from the figures in the coming months since the price of a barrel of oil has been increasing in recent months. It is therefore likely that CPI will turn positive again and therefore the real danger of deflation, when it persists and consumers and producers factor in falling prices, should be avoided.

For construction it is also important to note that the CPI index does not include housing costs (mortgages) and that the House Price Index was also released today which showed prices increased 9.6% over the past year. Given that so much of construction’s recent growth has been down to the housing sector it is more likely that the industry will be affected by this measure rather than CPI as a whole.

Michael Dall is an economist at construction market analyst Barbour ABI