‘Second wave’ of inflation set to hit construction industry

The head of the world’s largest building materials company has warned that the industry faces a “second wave” of inflation as spiralling energy prices drive up the cost of everything from wages to logistics.

Albert Manifold, the chief executive of CRH, said he is now seeing a “second wave of cost increases” following the surge in gas prices that accelerated after Russia’s invasion of Ukraine.

The Dublin-listed group, which works on major construction projects across Europe and the US and is valued at €30bn, was hit by a 50 per cent increase in energy costs in the first half of the year. Wages and logistic costs have been rising “since June or July”, said Manifold.

“The energy cost came through almost immediately after Russia invaded Ukraine,” said Manifold. “That put pressure on the cost of living and that is what is now driving wage inflation. As people absorb energy [cost] increases, they are ramping up the costs for logistics . . . central bankers and politicians have to deal with that challenge,” he added.

CRH’s projects include the construction of London’s new east-west Crossrail line and the HS2 railway line in the UK, long-term, government-backed plans that have helped insulate the company from the rising costs. That helped CRH report an almost 30 per cent jump in first-half profits.

Manifold’s view that the biggest inflationary worry for the construction industry now lies in the second-order effects of higher energy costs was echoed by other major companies.

Rob Perrins, chief executive of UK housebuilder Berkeley Group, said rising costs in the second half of the year were likely to slow the construction of new homes, particularly in London.

“Energy is the key [to inflation], but the second order is wage inflation and that does have to come through if energy prices and the cost of living keep going up, that’s the worry . . . I see [construction] projects falling off quite heavily in London [as a result of inflation],” he added.

Build costs, including materials, energy and labour, make up roughly half of Berkeley’s overall cost base. If those increase by 4 per cent a year, the company will have to choose between increasing sales prices by 2 per cent or taking an equivalent hit to its margins, said Perrins.

In the UK, the surge in inflation is already threatening to drive the economy into recession. Inflation is on track to exceed 18 per cent next year if gas prices sustain their surge, according to economists at Citigroup.

The Bank of England is targeting an inflation rate of 2 per cent annually, but the Berkeley boss anticipates that inflation will run at “4-5 per cent” for the next three to four years, even after the energy price spike eases back.