The latest inflation report from the Bank of England and the comments from the Governor Mervyn King have effectively put paid to hopes that interest rates are on the way down.

Consumer Price Inflation leapt back to 3% in April and the Governor has prepared himself to write a series of letters to the Chancellor over coming months in expectation that CPI will rise above 3% and stay there for some months.

This general inflation will impact on construction and will increase the strain on contractors as they seek to control costs, prop up margins and maintain business.

But for construction there are further lurking inflation problems. Not least the collapse in the value of sterling which is likely to add about £1 billion or so to the cost of UK construction.

The increase in energy prices is well documented, suffice is to say that the price of oil has double over the past year to record levels and is now approaching 10 times the price it was in the late 1990s when for a while the spot price dipped below $10 a barrel.

Energy price increases will impact on construction through various channels, but in large part through material price rises – in particular brick, blocks and cement. The Construction Products Association’s estimate is that energy represents 20% of non labour costs in building materials.

World commodity prices are also rising.

The latest Government data on construction materials shows the price of fabricated steel, for instance, rose a further 10% between January 2007 and January 2008 and cost more than 80% more than it did in 2003. That too will continue to add to the industry’s inflationary pressures.

But a big threat comes from the sinking pound. The materials figures show that the UK construction industry imports £11 billion worth of materials. That equates to almost 10% of construction output.

The effective exchange rate of the pound has dropped 10% or so (with trading against the Euro even worse at 15%) since the credit crunch bit so we are instantly looking, in very broad terms at a 1% increase in construction costs or an extra £1 billion or so.

This is a crude calculation and clearly there will be some product substitution, but it does illustrate the scale of the inflation threat in construction resulting from a sinking pound.

Obviously the flip side is that the UK building materials producers potentially have an easier ride abroad. But with energy costs going through the roof they need all the help they can get.

What is clear from the work of BCIS is that tender prices are already showing signs of rising sharply.

Could we be set for a sharp rise in construction costs which in turn will threaten not only profitability, but also industry orders?