The Federal Highway Administration released the last highway construction cost inflation data for calendar year 2021, and the 12-month average of the National Highway Cost Construction Index (NHCCI) was 7.3% higher than the 12-month average for calendar year 2020, according to an analysis from the ENO Center.
A 7.3% per year sustained cost increase has the potential to be devastating – the President’s Budget projects that federal highway spending under the Infrastructure Investment and Jobs Act will peak in fiscal 2027 at $70.0 billion in outlays, which is a 43.7% increase over fiscal 2021’s $48.7 billion.
43.7 divided by 6 equals an average annual federal highway spending increase of a little under 7.3% per year. So, 7.3% cost inflation per year, sustained for six years, would eat up the entire IIJA highway funding increase.
But there is reason to believe that the true story told by the fourth quarter 2021 NHCCI numbers is actually worse than that. To begin with, any year-long comparison versus 2020 is going to be a bit misleading because of the unique nature of the COVID recession of that year. (So, even though the fourth quarter 2021 NHCCI is 17.5% higher than the fourth quarter 2020 number, take that with a grain of salt.)
But, countering that, inflation didn’t really take off until the second half of 2021. Another way to look at inflation is in consecutive quarters. The fourth quarter 2021 NHCCI of 2.185 was 3.6% higher than the 3rd quarter 2021 index of 2.11. 3.6 times 4 equals an annual inflation rate of 14.2%. So, if the trends in the fourth quarter of 2021 are extrapolated, highway cost inflation in 2022 will be a lot closer to 14.2% per year than it will be to 7.3% per year.
A breakdown of the NHCCI components reveals that, unsurprisingly, increases in the cost of asphalt were the largest cost driver of the fourth quarter 2021 cost inflation. The price of asphalt is tied directly to the price of a barrel of crude oil, which skyrocketed, so asphalt by itself represents about 40% of the fourth quarter cost increase.
The next largest component of the cost increase is the cost of bridge work (all facets of which are lumped together into one category by FHWA), and the biggest driver of bridge cost is structural steel. Bridges were an additional 20% of the fourth quarter cost increase.