Sharp drop in manufacturing prices paves way for easing of material inflation, experts say

A sharp reduction in manufacturing input prices has paved the way for an easing of construction product inflation over the next few months, according to industry experts.

Manufacturing input prices, which are seen as an indicator of the cost of construction materials, fell by 2.7% in the year to June, down from a rise of 0.4% in the year to May.

Meanwhile, output prices rose by 0.1% in the year to June, down from a rise of 2.7% in the year to May.

Construction Products Association head of construction research Rebecca Larkin said the figures point to “further relief from the double-digit increases in prices for construction products and materials that have been recorded over the last 18 months”.

But she warned that even as inflation slows, prices are still rising on top of last year’s 19.1% increase and the 15.2% rise in 2021.

The figures were part of a wider release today showing inflation slowed last month to 7.9% from 8.7% in May.

Share prices of the UK’s top housebuilders shot up by as much as 9% this morning following the surprise drop.

The housing sector has been squeezed by higher mortgage rates which have risen over the past 18 months in response to the Bank of England’s repeated interest rate hikes.

But experts say the central bank is now likely to opt for a 0.25% raise next month instead of 0.5%, bringing the base rate up to 5.25%.

Increased confidence in housing this morning saw the share price of Persimmon, the UK’s second biggest housebuilder, jump by 9.4%, while Barratt, the country’s largest, saw its share price rise by nearly 7%.

Taylor Wimpey’s share price was up by 6.6% this morning, while Vistry’s was up 6.5%, Bellway’s was up 6.3% and Berkeley’s rose 5.2%.

Simon Rawlinson, head of strategic research and insight at consultant Arcadis, said the inflation results were “the news we needed to hear”.

“There was a lot of concern that the Bank of England’s trends would continue,” he said, adding the inflation slowdown relieves pressure off the bank to take further action in their next meeting in August.

Bank of England governor Andrew Bailey has overseen a total 13 rate rises since December 2021. 

Analysts Capital Economics predict rates will now peak at 5.5%, down from the forecast of 6% which would have occurred without June’s drop in inflation.

Larkin said the sharp rise in interest rates so far has “noticeably dented confidence” in the housing market, as well as in sectors such as commercial offices and industrial warehouses where developers had grown accustomed to the ultra-low interest rates of the last decade.

“Once we get clear signs that the rate-hiking cycle is near its end, at least that provides some clarity for potential house buyers and the housing market,” she added.