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  • Writer's picturechris

Construction cost inflation is getting boring again...

Now what am I going to write about? Greater market inflation continues to struggle several points above the FED's preferred 3% target, but in the construction markets, overall inflation continues to drift along at below normal rates.

I'm tackling the same topic as my Janaury post, but expanding on the idea.

Looking at the first chart below, you'll think I'm crazy. Escalation is declining, the chart says it right there! Well, look at the second chart.

The first chart shows the sum of cost increase over the last 12 months, a very common way to portray construction escalation. It yields a nice curve, points in a direction and is a common way to portray escalation. The second chart shows increases on a monthly basis, (thus the much lower percentage), and only the escalation for that month. It's seems less directional and is thus less useful. It is based on the same data, but it seems to tell a different story.

It's an interesting exercise to consider: A common (best practice?) way to "annualize" rates is to take the average of the trailing 12 months. We are however in a brief period where that isn't a reasonable way to look at the data. Calculated that way, construction inflation is currently 4.99%. This is not indicating an accurate picture of the situation.

Another way to annualize the data is to take each month, multiply it by 12, to make it an annual rate, and average the period of interest. For the same trailing 9 months, the average of the annualized rates is 1.97%, while the same calculation for 12 months yields 4.99%. If you are using a 5% rate to escalate costs going forward, it's tough to call it a reasonable projection. (note: ENR data doesn't capture all escalation, and there a few of those factors were big problems in the last year, and may yet come to pass this year)

Of course specific trades, materials and temporary market conditions are having impacts that drive costs up, and other trades price declines (steel and lumber), are offsetting that to some extent. Market forces such as changes in bidding strategies, labor availability and other factors are also distorting small picture escalation impacts.

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