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Constant Dollars – Impact of Inflation

2-4-17

Current $ vs Constant $

This clearly shows the impact of inflation on comparing Construction Spending data. Reports commonly compare current $1.166 trillion 2016 total spending today back to the (then) current $1.150 trillion at 2006 peak. Of course that seems to establish a new high. But that is so misleading.

Constant $ adjusted for inflation converts all past spending into 2016$ for an equalized comparison. From the low point in 2011 we’ve increased spending by 51% but in constant 2016$ we’ve added only 31% in volume and we are still 16% below the 2005 peak.

As measured in comparable constant dollars, No, we are not back to previous levels of spending. We will probably not return to previous highs before 2020.

The widening gap from right to left, as we look back in time, is the cumulative affect of inflation. It might be only 2% or 4% looking back one year, but back to 2003 it’s 40%.

spend-current-vs-constant-2003-2016-2-3-17

Impact of Inflation

In all projections, the affect of inflation must be considered. Why is tracking inflation important? Well, as an estimator it’s necessary to assign the appropriate cost to items over time. And it’s needed to properly interpret construction economics. But it’s also important for business management.

bci2001-2016-2-9-17

Due to construction inflation, a company that was building $700 million in nonresidential buildings in 2005 needs to build $1 billion today just to remain the same size as in 2005. Increasing revenues by 5% annually in a period when inflation is increasing by 5% is not increasing annual volume. While revenue may be increasing, volume would be static. Over a period of years, if this were to occur, since some companies will grow, the amount of volume available to bidders could potentially restrict growth in the number of bidders able to secure new work or in the growth in the size of companies.

In this table, both the index values and the resultant annual escalation are shown. The index value gives cumulative inflation compared to 2016$.

index-2003-to-2017-edz-from-prod-2-17-17

 

SEE ALSO these other posts 

Are We at New Peak Construction Spending?

Construction Inflation Index Tables

Construction Cost Inflation – Midyear Report 2016


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