Cost is one of the essential parameters of the construction project and any variation in it can bring the project to the failure. The Inflation rate is considered as a primary factor which causes cost overrun. To examine this scenario in the construction industry of Pakistan, this study has been performed. The materials prices were examined statistically with the inflation rate to evaluate their correlation. First, the percentage deviation was calculated to examine the variations in the prices. Afterwards, the Spearman correlation coefficient was calculated to investigate their interrelation. Based on the results it was revealed that inflation rate is the foremost factor in diverging the prices, as it was found to be strongly correlated. The strong relationship indicates that the shift in the inflation rate raises the prices of the materials, resulting in project cost overrun. Here, in this case, the relationship appeared to be inversely proportional. Therefore, the construction industry's decision-makers need to come up with a solution to incorporate the inflation rate in cost estimation at the bidding stage. © 2020 IEEE.