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Inflation in construction versus the CPI – Right Now.



Interesting study in how data can mislead, or fail to provide complete information:



The rate of inflation, both in the greater economy as shown by the Consumer Price Index (CPI), is trending down, but is in a high range, when calculated as a 12 month trailing average. This is the standard method of presentation of CPI, and is useful in understanding how consumers have been affected. The ENR Building Cost Index (BCI), when calculated the same way, shows the extraordinary inflation that construction has encountered during the past 2 years. I generally recommend looking at trailing averages; it’s a more conservative method, and also because the volatility of the month to month information can lead to unreasonable conclusions. However, one item that the trailing average does not show well is what is happening today in the construction and greater economic markets.

The main problem I have with the above chart, is that the data includes the extraordinary inflation we encountered in spring and early summer 2022, which is unfairly pushing the annualized rate up.


At this point, it isn't reasonable to assume that inflation going forward should be influenced by the historically high rates of early 2022. Escalation projections based on data from that period should be considered carefully.




The second chart shows the simple monthly rate of change, and the picture is drastically different. BCI rather than declining gradually has flatlined at a near zero rate since August of 2022, and CPI, which is a bit more volatile at the moment, is also moving sideways at a relatively low rate.


The month to month rate of inflation since August of this year, in the construction markets has hovered very close to zero. However the way that it is usually portrayed, is as an annualized rate. As shown in the first chart – the ENR Building Cost index (BCI) dropped to near zero increase in the late summer of 2022, and remains very low, averaging around 0.1% per month. The Consumer Price Index, a similar measure of the overall economy, which when averaged over 12 months tends to be somewhat lower than the BCI, but for the last few months has ranged higher, but still at a low rate of growth. If you consider data only from August through November 2022, the CPI has been trending at 2.4% (annual) and BCI has been trending at 0.06% annual rate of increase.

BCI tends to run higher than CPI, in part because CPI is based over a much wider range of materials which tend to average out, but also because BCI includes labor rates, which do tend to increase faster than material costs. It’s worth noting that CPI is exceeding BCI during the last few months, which seems to indicate that labor costs are not creeping up at the moment.

By the way, I have to apologize for the title, "Right Now" is not quite the right term. CPI data takes quite a while to compile so the most current info is November. BCI is somewhat more automated, and draws from fewer sources, so they are able to calculate quite rapidly.


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