Case Study: How Inflation Can Nullify Transportation Funding Increases
February 18, 2022|Jeff Davis
If you follow economic news, the last few weeks have seen unsettling signs of inflation. On February 10, it was announced that the Consumer Price Index (CPI) rose at an annualized rate of 7.5 percent in January, the highest rate since February 1982 (the tail end of The Great Inflation that lasted from the late 1960s to the end of 1982). Looking deeper, the Producer Price Index (PPI) for final demand was up an annualized 9.7 percent in January.
What does this mean for infrastructure construction?
While CPI is the most common inflation measure, it is a poor fit because it focuses on consumer costs like housing, food, cable TV bills, gym memberships, health care costs, pet care, etc. which are not the kind of things that governments spend a lot of infrastructure money to purchase. One can cobble together PPIs for a better look, but the Federal Highway Administration already keeps a measure for highways – the National Highway Construction Cost Index, or NHCCI.
Using recent experience, in the fourth quarter of calendar year 2015, when the FAST Act was signed into law, the NHCCI stood at 1.66. At present, the most recent data we have is the second quarter of 2021 (April-June 2021), when the NHCCI was 2.03, meaning that the cost of highway construction increased by 22.3 percent over that five-and-a-half-year period.
Meanwhile, outlays from the Highway Account of the federal Highway Trust Fund were $42.95 billion in fiscal year 2015 (which had just ended when the FAST Act was signed) and had risen to $48.27 billion in fiscal 2020, the last year of FAST. That is a $5.32 billion increase, or 12.4 percent, meaning that so far, all of the FAST Act’s highway funding increases have been more than eaten up by increases in highway construction costs (and then some).
(You may ask why I didn’t use fiscal year 2021 as the end point of the calculation, instead of FY 2020. The reason is that because of COVID and end-of-authorization uncertainty, Highway Account outlays dropped in FY 2021 to $45.72 billion and I thought that was a bit misleading.)
Much of the recent increase in the cost of construction is due to the increased price of asphalt, which is directly linked to the price of a barrel of crude oil. The other big increase is in the cost of excavation, which is partly due to oil prices (the diesel fuel that runs the heavy equipment) and partly due to the labor shortage (excavation is labor-intensive).
Oil prices rise and fall all the time, but once systemic inflation gets going, it affects everything. A while back, I wrote a two-part history of the epic struggle behind the 1978 highway act (part 1, part 2) and when doing the research, it was striking how much concern was expressed in Congress and the White House that increasing transportation funding might exacerbate inflation. I put together the data for Highway Trust Fund spending and compared them to the components of the NHCCI’s predecessor, the FHWA Bid Price Index.
Despite the fact that the 1973 and 1976 highway acts had provided funding increases, and the fact that the 1974 Budget Act’s abolition of presidential impoundment authority allowed states to spend all their pent-up carryover balances in 1976, spending from the Trust Fund was only 29 percent higher in fiscal 1978 than it had been in 1972. But over that same period, The Great Inflation had caused the price of excavation to more than double. Both asphalt and portland cement concrete had increased in price by around 85 percent, almost three times as much as highway spending had increased.
|Highway Construction Inflation in the 1970s|
|Fed. HTF||FHWA BPI Reported Cost Of:|
|Outlays||Excavation||PC Concrete||Asphalt||Struc. Steel|
|(Billion $)||(cu. yd.)||(sq.. yd.)||(ton)||(lb.)|
The lesson here is that, just as inflation means that households can afford to buy fewer goods and services with each paycheck, even if the paychecks increase here and there, inflation also means that governments will build fewer infrastructure projects for every million dollars they spend.
September 13, 2023 | Sohail Husain
September 13, 2023 - The U.S. Senate Committee on Environment and Public Works met to examine the effects of extreme...
August 4, 2023 | Jeff Davis
August 4, 2023 - For decades (starting in the 1980s), a group of states, mostly from the Sun Belt, habitually...
July 28, 2023 | Anusha Chitturi
July 28, 2023 - The Senate Environmental and Public Works’ subcommittee on Clean Air, Climate, and Nuclear held a hearing...
July 28, 2023 | Jeff Davis
July 28, 2023 - We have updated our cumulative statistics on TIGER-BUILD-RAISE grants from their origin in 2009 to the...
June 16, 2023 | Glendedora Dolce
June 14, 2023 - The U.S. Senate Committee on Environment & Public Works this week held a hearing with Federal...
May 19, 2023 | Jeff Davis
May 19, 2023 - It looks more likely than not that some kind of permitting reform for construction projects will...
May 12, 2023 | Philip Plotch
May 12, 2023 - The Alan M. Voorhees Transportation Center celebrated its 25th anniversary this month with remembrances of a...
May 12, 2023 | Jonathan Hammond
May 12, 2023 - The Eno Center for Transportation has selected Glendedora Dolce as our 2023 Thomas J. O’Bryant Fellow....
March 31, 2023 | Philip Plotch
March 31, 2023 - A subcommittee of the House Transportation and Infrastructure Committee held a public hearing on March 28...
March 17, 2023 | Jeff Davis
March 17, 2023 - When we ask, "what does the federal government spend on transportation," the answer isn't always just...
February 17, 2023 | Jeff Davis
February 17, 2023 - The new CBO baseline projects more bad news for the Highway Trust Fund but a rosier...
February 17, 2023 | Jeff Davis
February 17, 2023 - The Treasury Department invests the cash held by the four transportation trust funds in radically different...