Inflation Threatens to Erode Impact of $1 Trillion Infrastructure Law

Rising prices and clogged supply chains are expected to mitigate the impact of the $1 trillion infrastructure bill passed by Congress with bipartisan support last year.

Source: WSJ | Published on February 24, 2022

Helicopter Aerial View of the famous Los Angeles Four Level freeway interchange

How many roads, bridges, railways, fiber optic lines, and other types of infrastructure the United States can build or repair under the law—a central achievement of President Biden's that experts say is a generational investment—will largely depend on the extent of increases in everything from diesel fuel prices to worker wages.

According to government data, rising material and labor costs are already causing contractors to charge more for construction projects, which economists and industry officials say may limit the number of infrastructure projects that can be funded with the new federal funds. State and local officials facing higher prices may prioritize easier, less ambitious projects, and some are concerned that a rush of government spending will exacerbate industry inflation.

"As the cost of materials for these projects rises, you'll be able to do fewer projects," Jim Tymon, executive director of the American Association of State Highway and Transportation Officials, said. "All of those factors will have an impact on how far this infusion of new federal funding will go toward addressing our infrastructure problems."

According to Labor Department supplier price data released last week, the cost of government construction projects increased 13% in January compared to the previous year. The producer-price index also revealed that input prices for highway and street construction were up 20% year on year, with steel mill products and plastic construction products up 113% and 35%, respectively. The cost of gasoline and diesel fuel has increased by more than 50%. These price increases have far outpaced consumer inflation, which has risen at the fastest rate in four decades.

"The impact on infrastructure is even greater than it is on the overall economy," said Rick Geddes, founding director of Cornell University's Program in Infrastructure Policy.

While construction material prices are expected to level off eventually, wage gains may be more durable.

According to Labor Department data, average hourly wages in the construction industry increased by about 5% in January compared to the previous year. The construction industry is still short about 100,000 workers compared to February 2020, according to a December survey of construction contractors conducted by the U.S. Chamber of Commerce, and 91 percent of respondents reported difficulty finding skilled workers. A persistent labor shortage in the construction industry may necessitate additional wage increases.

Some in the industry believe that technological advancements, as well as new job opportunities created by federal infrastructure spending, will help to alleviate the labor shortage. However, Ken Simonson, chief economist for the Associated General Contractors of America, believes that increased flexibility and rising wages in other jobs may limit the attraction of new workers to construction jobs, where workers must be on site.

"I'm concerned that the situation will worsen rather than improve," he said. According to Labor Department data, while hourly wages for construction workers continued to rise, they did so at a slightly slower rate than wages for private-sector workers overall in the previous year. "That will make it more difficult to attract and retain employees," Mr. Simonson added.

According to Gordon Lansford, CEO of J.E. Dunn Construction Co. in Kansas City, Missouri, the company recently aimed to staff a hospital construction project with 400 workers but was only able to hire 300.

"It slows the project's pace or necessitates overtime work, which obviously costs more and raises the project's cost," he explained.

The law authorizes approximately $1 trillion in spending, of which approximately $550 billion exceeds previously projected federal infrastructure investments. Mr. Biden signed the bill into law in November, but much of the money is still in Washington and will be spent over a five-year period.

According to economists, higher prices may influence state and local governments' decisions on how to spend the new federal funds. If prices continue to rise, officials may prefer projects with shorter timelines and, as a result, more predictable costs, or projects that rely less on volatile commodities like steel.

"There's this hidden effect of inflation that should push you to choose projects that have less risk of delay and more certainty of cost," said Leah Brooks, an economist at George Washington University's public policy school. "Those are most likely smaller projects."

In other cases, infrastructure officials will most likely choose projects based on need, which means they will simply have to accept the higher costs and longer timelines for the projects.

"If your bridge is breaking, you have to fix it, even if it takes months for your components to arrive from Thailand," Ms. Brooks explained.

According to some contractors and experts, the new federal funding will increase demand for scarce materials and labor, driving up prices even further. Others disagree, claiming that the funds' multiyear payout will drown out any cost-cutting effects.

"Demand for the materials will rise, but it will be gradual," said Alison Premo Black, senior vice president and chief economist at the American Road and Transportation Builders Association. "We're expecting it."