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Published: 22/10/2026
Higher inflation adds to the pressures facing construction, with weak demand limiting contractors’ ability to recover rising costs. Sam Parkin, senior economist at BCIS, considers what the latest figures mean for the sector ahead of next week’s Autumn Budget.
Consumer price inflation (CPI) rose to 3.5% in September, up from 3.1% in August, continuing the increase we expected as higher energy costs feed through the economy. For construction, the concern is how those pressures affect project costs and the financing needed to bring work forward.
The figures also complicate the Chancellor’s task ahead of the Autumn Budget. Supporting investment in a weak economy while managing inflation and government borrowing costs leaves limited room for manoeuvre.
What is driving inflation?
Motor fuels made the largest upward contribution to the increase in annual CPI inflation in September. Higher fuel costs affect consumers directly, but also increase the cost of transporting goods and operating machinery across the economy. Construction remains exposed through materials deliveries and site operations.
Annual inflation depends on both current prices and those recorded a year earlier. September’s increase reflects rising petrol and diesel prices compared with falls in the same month last year. These comparisons help explain movements in the annual rate, alongside the underlying cost pressures.
There are also signs of inflation broadening beyond energy. Core CPI, which excludes energy, food, alcohol and tobacco, rose to 2.8% in September, from 2.6% in August.
That will concern the Bank of England as it considers whether higher energy prices are generating more persistent inflation. An interest rate increase is a possibility, although the decision will depend on the wider evidence. For construction, higher borrowing costs would add another obstacle for clients assessing whether projects are viable.
Producers and contractors face cost pressures
The latest producer price figures show further pressure in the supply chain. Manufacturers’ input prices rose by 8.3% in the year to September, up from 6.7% in August. Factory gate prices increased by 4.6%, compared with 3.8% a month earlier, recording their strongest annual rise since April 2023. Oil-related products were the main drivers of both increases.
These indices cover manufacturing more broadly, rather than construction materials alone. Nevertheless, they illustrate the pressures affecting businesses that supply construction.
Input prices rising faster than output prices can indicate pressure on producers’ margins, although the two indices cover different baskets and cannot establish how much cost businesses are absorbing.
For contractors, weak demand limits the scope to pass higher costs on through tender prices. Feedback from BCIS tender price panels points to continued pressure on margins as businesses compete for available work.
Pricing aggressively may help secure a contract, but it also increases exposure to further cost rises. In a volatile commodity market, assumptions made when bidding can become difficult to sustain during delivery.
A difficult balance for the Budget
Rising inflation strengthens the case for caution in the Autumn Budget. The government faces pressure to support growth, but additional spending can add to inflation depending on its scale, timing and purpose. Government borrowing costs also constrain what is affordable.
Equally, spending cuts could weaken demand further. For construction businesses waiting for projects to proceed, reduced public investment would compound an already difficult trading environment.
Much of the current energy price pressure originates overseas, limiting the government’s ability to address its causes directly. It can provide support, but absorbing higher costs carries a fiscal cost and cannot offer an indefinite solution.
My expectation is therefore for a cautious Budget focused on stabilising the economy, with limited scope for major interventions.
For construction, the question will be whether the measures announced help projects move towards delivery or introduce further costs that undermine viability. A credible, funded pipeline would support investment decisions. Businesses will judge the Budget by the work it enables and the conditions under which they are expected to deliver it.
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