Inflation threatens to undermine impact of $1 trillion infrastructure law

How many roads, bridges, railways, fiber-optic lines and other types of infrastructure the US can build or fix under the law – a central achievement of President Biden that experts say is a generational investment – is largely Depends on the extent of growth in the cheese. From the cost of diesel fuel to the wages of workers.

Elevated costs for materials and labor are already prompting contractors to charge more for construction projects, government data show, economists and industry officials say, adding that infrastructure projects could undercut The new federal money could finance that. State and local officials facing higher prices may prefer easier, less ambitious projects, and some worry that the rush of government spending could drive inflation in the industry.

“As the cost of materials for these projects goes up, there are going to be fewer projects that you are capable of doing,” said Jim Tyman, executive director of the American Association of State Highway and Transportation Officers. “All of those factors are going to have an impact on how far this influx of new federal funding is going to go into addressing our infrastructure problems.”

The cost of construction projects to the government rose 13% in January compared to a year ago, according to supplier price information released last week by the Labor Department. The producer-price index also showed that input prices for the construction of highways and roads were up 20% from a year ago, with steel mill products and plastic construction products rising by 113% and 35%, respectively. The price of gasoline and diesel fuel has increased by more than 50%. Those costs well outweigh consumer inflation, which rose 7.5% in the past year, the fastest rate in four decades.

“The hit to the infrastructure world is far greater than that of the broader economy,” said Rick Geddes, founding director of Cornell University’s Program in Infrastructure Policy.

While experts expect construction material prices to eventually come down, the wage benefit could prove more permanent.

The average hourly wage in the construction industry rose about 5% in January from a year earlier, according to Labor Department data. There is still a shortage of nearly 100,000 workers in the construction industry compared to February 2020, and a US Chamber of Commerce survey of construction contractors in December found that 91% of respondents had difficulty finding skilled workers. A persistent shortage of construction workers can lead to additional wage increases.

Some in the industry hope that technological advances, as well as new job opportunities generated by federal infrastructure spending, could ease the labor shortage. But Ken Simonson, chief economist at Associated General Contractors of America, said more flexibility in other jobs and rising wages could attract new workers to construction jobs where workers need to be on site.

“I worry that the situation is not going to get better, it is only going to get worse,” he said. Still rising, the hourly wages of construction workers grew at a slightly slower pace than wages for private sector workers overall. Over the past year, according to Labor Department data, “this will make it harder to attract and retain workers,” Mr. Simonson said.

Gordon Lansford, chief executive of JE Dunn Construction Company, based in Kansas City, Mo., said the company recently aimed to complete a hospital construction project with 400 workers, but was only able to hire 300. .

“This slows down the pace of the project or requires overtime work, which obviously increases the cost and cost of the project,” he said.

Of the roughly $1 trillion in spending authorized by law, about $550 billion is more than previously estimated federal investments in infrastructure. Mr Biden signed the bill in November, but much of that money is still tied up in Washington and is set to be spent over five years.

Economists said the higher prices could affect decisions by state and local governments about how to spend the new federal money. If prices continue to rise, officials may prefer projects with shorter time-frames — and therefore more fixed costs — or projects that rely less on volatile commodities like steel.

Leah Brooks, an economist at George Washington University’s School of Public Policy, said, “Inflation has this hidden effect, which is that it tends to make you choose projects that have less risk of delay and greater certainty of cost.” it occurs.” Maybe smaller projects.”

In other cases, infrastructure officers will select projects based on need, which means they will have to easily absorb the high cost and long timelines for the projects.

“If your bridge is breaking you have to fix the brakes, even if you have been waiting months for your components to arrive from Thailand,” said Ms Brooks.

Some contractors and experts say the new federal funding will increase demand for scarce materials and labor, which will further drive up prices. Others disagree, saying that the multi-year payment of the funds would mute any impact on costs.

“Demand for the material will increase, but it has spread over time,” said Alison Premo Black, senior vice president and chief economist for the American Road and Transportation Builders Association. “We know it’s coming.”