As if the confusion over the credit crunch’s causes and effects is not enough, we now have the related confusion over inflation. What is a good level for inflation to fall to if deflation is a fear?

We have just experienced a steep decline in inflation with the CPI measure dropping from 4.5% to 4.1% in November which followed the fall from the September rate of 5.2%.

That all sounds very good and yes it is, but…

…the good news actually is that it didn’t drop further, or at least as much as some people feared, with deflation now the spectre stalking the frontal lobes of many economists.

So that means a higher than expected rate is a good thing even though it is twice the target figure set for the Bank of England.

No wonder people get confused.

But what of construction?

Personally I’m still smarting over how wrong I was a few months ago to think that cost price inflation was one of the bigger problems facing construction firms. Long term, I suspect that position remains true, but to mangle the well-worn Keynes quip, in the long run many construction firms will be dead in the face of this recession.

Importantly, I think it’s probably unwise to try to predict too much from one or two month’s inflation figures at the moment. It would be a bit like trying to predict where a car will end up after it hits a patch of black ice. So much depends on the reactions and decisions of the driver.

We are in a state of some considerable confusion economically. And a big concern for contractors and clients at the moment is the level of uncertainty over costs.

Commodity prices are falling, providing downward pressure on construction costs. The recessionary pressures in the UK should contain labour costs inflation.

But we import as a nation about £12 billion worth of materials and the price of these will be subject to exchange rate fluctuations. And at the moment that points to inflationary pressure with the pound plunging to new depths.

Before the credit crunch a Euro cost less than 70p, now it costs about 90p. That potentially represents more than 25% inflation in goods imported from the Euro-zone which is a major supplier of building materials to the UK.

So while there are deflationary pressures within the cost of construction there is also a significant inflationary threat.

Construction firms will have to plan extremely carefully going forward to ensure that in a broadly deflationary environment they do not fall victim to unexpected hot spots of inflation.

The temptation to take on big fixed price deals may be great, but we are entering a period of unprecedented risk. So caution may be the appropriate watchword.