Inflation Fairly Tame, Even in the Construction Industry

Inflation remains a shadow of its once fearsome self.

Inflation remains a shadow of its once fearsome self (for anyone who had to deal with it in the 1970s at least). The Bureau of Labor Statistics reported on Thursday that the Consumer Price Index for all urban consumers actually fell by 0.2 percent in September, though the drop was entirely on account of a decline in the price of energy, specifically gasoline. The CPI without food and energy actually was up for the month by 0.2 percent. Still, that’s not much.

Over the last 12 months, the all items index was essentially unchanged—0.0 percent inflation, in other words. That’s the result of a mixed bag of price moments: The price of shelter (apartments especially), medical care, household furnishings and operations, and personal care all increased; the price for apparel, used cars and trucks, new vehicles and airline fares were among those categories that declined.

Low inflation has its charms for real estate, helping to keep costs steady. On the other hand, there’s also no inflationary impetus to raise rents. In the cases in which local market fundamentals allow rental increases, such as in the hottest residential markets—San Francisco, Seattle and so forth—then low inflation is very good indeed for owners.

For developers, construction costs are edging up, on average, only a little faster than the general rate of inflation, at least for now, though in the hotter markets, costs are rising a lot faster. According to Engineering News-Record, construction costs as of July 2015 were up at an annual rate of 2.1 percent (the latest month for which figures are available, and in fact the month increase in July was 0.0 percent), based on a survey of the 20 largest metros. Construction industry wages were up 2.9 percent year-over-year in July, mostly as the result of high demand for labor in markets with a great deal of residential development.

Inflation in material costs for the construction industry was a more mixed picture, according to ENR. Overall, materials were up 1.7 percent in July on an annual basis, which masks some variety among increases. Cement, for instance, was up 0.9 percent, and steel up only 0.3 percent. Lumber, by contrast, spiked 5.2 percent year-over-year in July.