Inflation is, in former US Defence Secretary Donald Rumsfeld’s term, a “known unknown”. We know that prices tend to change over time but we do not know how much or when. Therefore, when considering future expenditure this uncertainty is a risk.
The magnitude of the risk will be exacerbated by the length, size and location of a project. The longer the project the greater the uncertainty, the larger the project the greater the monetary value of the risk, and in some parts of the globe prices are more volatile than in others.
The most common method of allowing for inflation is by use of indices. In the UK the most commonly used indices are the price adjustment formulae indices (PAFI) prepared by the Building Cost Information Service (BCIS) of RICS.