Information released this week by the Federal Highway Administration (FHWA) shows that the cost of building highways increased by 3.8 percent in the April-June 2023 quarter versus the previous quarter, equivalent to a 15.3 percent annual inflation rate. This shows that, even though inflation had lessened elsewhere in the economy by that point, it was not yet done with highway construction.

FHWA maintains the National Highway Construction Cost Index (NHCCI) on a quarterly basis, which was updated this week. In mid-2021, the NHCCI began growing rapidly, peaking in the April-June 2022 quarter. After a temporary respite in the October-December 2022 quarter, things began accelerating again. Since the end of 2020, the NHCCI says that highway construction costs have increased by 59.3 percent.

(Ed. Note: Economists measure quarters in terms of calendar years. Budget people measure quarters in terms of fiscal years. And not all state governments use the October 1 – September 30 fiscal year that the federal government uses. The same three-month period can be the first quarter of the calendar year, the second quarter of the federal fiscal year, and the third quarter of the median state fiscal year. Once you have been burned a few times, you learn to use month names instead of numbers to identify quarters in articles that mix economic data and budget data.)

The detailed analysis of the quarterly change from FHWA staff indicates that, unsurprisingly, the largest share of the increase was from rises in the cost of asphalt, which is dependent largely on the price of petroleum over time. But the second-largest cause of the quarterly increase was from traffic control, which is particularly labor-intensive.

(Table 2 in the FHWA narrative also shows how price indices for most components of highway costs have varied by quarter since 2020, many of which are quite volatile.)

The FHWA staff assembled the following chart, comparing the NHCCI (thick solid red line) with several other measures of inflation – the Consumer Price Index, the Producer Price Index for all commodities, and the Employment Cost Index for construction.

The FHWA staff analysis concluded that “While the differences in the NHCCI and PPI may seem to suggest that labor costs are a driving factor in NHCCI inflation, the relatively low and stable inflation in the ECI for construction is inconsistent with this assessment. The disparities in growth among the indices underline that each index’s sensitivity to broader events varies, including the COVID-19 pandemic, supply chain disruptions, material shortages, and oil price swings.”

New Federal Highway Administration spending obligations (excluding emergency relief) in fiscal years 2021, 2022, and the first three quarters of fiscal 2023 totaled $152.0 billion in nominal terms. But if one re-bases highway construction costs to the last quarter of calendar year 2020 (first quarter FY 2021) and then deflates everything afterwards, that $152.0 billion in new obligations deflates to a “real” total of $116,8 billion, meaning that $35.2 billion in real buying power of the IIJA and regular funding has been lost to highway construction cost inflation since then.

Put another way: like other kinds of outdoor construction, highway construction is very weather-dependent and thus the spending has seasonal ebbs and peaks. You can really only compare total dollar amounts in the same month or quarter of each year. The last comparable pre-IIJA quarter was April-June 2021, when new FHWA spending obligations totaled $14.8 billion. In the matching April-June 2023 quarter, thanks to the IIJA, that total jumped to $19.4 billion, an increase of 31 percent (+$4.6 billion).

But during this same time period, the NHCCI has jumped from 2.0363 to 2.9692, an increase of 46 percent. In terms of “real” dollars, new FHWA spending commitments in April-June 2023 were $1.4 billion below their April-June 2021 equivalent (down from $14.8 billion to $13.3 billion).

Most states use a July 1 – June 30 fiscal year, and if you simply average the four quarters of a fiscal year, highway construction costs in state fiscal year 2022 were 18.6 percent higher than they were in state fiscal year 2021, and in state FY 2023, costs had risen another 24.7 percent above fiscal 2022 (on average).