Appendix C Assessment of Differential Inflation Rates
Road authorities use standard indices to update the value of maintenance work prices each year, to manage the risk of inflation in contract costs.
No prediction of specific road cost indices was available for the 20 years analysis period used in this study as the costs are considered too volatile to predict over the time period. Predictions for broader indices are available for more general construction costs but these are less applicable for road maintenance activities (BCIS, 2011a). To overcome the difficulties in predicting future price increases, a more appropriate assessment method was considered to be the use of historic trends of various indices to represent the future potential changes.
The ROCOS index (Road Construction Resource Cost Index) (BCIS, 2011b) was compared against the Treasury GDP deflator, Retail Price Index and Consumer Price Index. Since 2000, the average annual differential between ROCOS and the various indices was around 4%, and against the Treasury GDP deflator it was 3.9%. Based on experience of the last 10 years, an annual rate of 4% seemed a reasonable basis on which to test the sensitivity of maintenance works costs.
The assumption was also tested finally against oil price predictions from the Department of Energy and Climate Change (Department of Energy and Climate Change, 2011). There were a range of predictions, ranging from low increases (average prices from 2010 onwards varying from 40-50% below 2008 prices) to high increases (prices rising to 40% above 2008 prices by 2015 and peaking and stabilising at 50% above 2008 prices from 2020 onwards). With the differences in these estimates and difficulties with forecasting, and the fact that prices impact on both inputs (e.g. construction price inflation) and impacts (e.g. vehicle operating costs) it was considered that for the purposes of this study, the 4% figure derived from cost price indices described above, would be adopted for the sensitivity tests described in Section 6.3.2.