Economy Watch: Construction Costs Outpace Inflation

It's been a long time since inflation has been more than a whimper, but, by contrast, construction costs are rising at a stiffer pace.

It’s been a long time since inflation, at least as measured by the broad Consumer Price Index, has been more than a whimper, but by contrast construction costs are rising at a stiffer pace. First, the overall rate of inflation: according to the Bureau of Labor Statistics On Thursday, the CPI for All Urban Consumers dropped 0.7 percent in January. That was mainly because of the price of gasoline, which fell a remarkable 18.7 percent for the the month. Fuel oil and natural gas were also down, though electricity edged up. Without energy and food — the so-called core rate of inflation — prices would have been up 0.2 percent for the month.

For 12 months ending in January 2015, the all-items index was down 0.1 percent, the first annual negative reading since October 2009. Take away energy and food, and prices are up 1.6 percent. Compare those meager rates of inflation to a metric that more directly affects the commercial real estate industry — construction costs, — and it’s clear that the resurgence of development is putting some upward pressure on costs (not counting land, whose price tends to be a market-by-market or even more localized phenomenon).

According to Engineering News-Record (ENR), total construction costs for the 12 months ending in February 2015 were up 2.9 percent. Not exactly a raging monster, but ahead of the broader rate of inflation; and the month before, the rate had been 3.2 percent. Both labor and materials prices were up. Wages paid to laborers, for instance, were up 2.8 percent for the year. Some especially busy markets are seeing even higher labor cost increases.

As for materials, those were mostly up at higher-than-inflation rates, too. ENR’s 20-city average price for rebar rose 0.1 percent in February and is currently 3.4 percent above the February 2014 level. Other materials were up a lot more: ENR’s 20-city average price for gypsum wallboard is 21 percent above a year ago.  Reinforced-concrete pipe prices remained almost stable in February, following January’s 0.4 percent increase, and was up between 3.2 percent and 4.9 percent for the year. Paving asphalt was up 3.5 percent for the year, though the lower price of oil is expected to put downward pressure on that material eventually.