Inflation Cuts Deeply into Infrastructure Law’s Highway Funding

Unprecedented inflation could cut into federal infrastructure law funding for highway construction by as much as 40%, a U.S. agency estimates.

If construction costs continue to rise at the rate they did between 2021 and 2022, the $379.3 billion allotted for highways would have real purchasing power of only $224.2 billion over the next five years, according to the U.S. Bureau of Transportation Statistics.

That’s a 40% reduction. BTS calls that its “High Inflation Scenario.”

Under its “Modest Inflation Scenario,” infrastructure buying power drops by 31% – to $260.5 billion – over five years.

The record-level inflation comes from a 26% increase in highway construction costs in 2022, which beats the previous record of 20% set in 2005. According to BTS, the inflation continued for highway construction costs into third quarter 2023, the most recent data available, at 25% higher from the first quarter of 2022.

Causes of increased constructions costs include a 594% increase in the price of crude oil, which is used to make asphalt, between April 2020 and June 2022. The supply chain disruption caused by the pandemic also contributed by reducing the availability of highway construction materials.  

chart with line showing rise of highway construction costsU.S. Bureau of Transportation Statistics

$7.4 Trillion for Infrastructure Sought

Despite the reduced buying power, another recent report calls on Congress to continue funding the infrastructure law beyond its expiration date of 2026.

Failure to continue funding infrastructure at current levels and reverting to pre-law allocations will result in an infrastructure funding gap of $3.7 trillion by 2033, according to the American Society of Civil Engineers. That scenario puts the country at less than 50% of its total needs, says ASCE’s new Bridging the Gap report.

In all, the report estimates the U.S. needs to spend $7.4 trillion between now and 2033 to meet the needs of the country’s highways, bridges, rail, transit, drinking water, stormwater, wastewater, electricity, airports, seaports and inland waterways.

If the $1.2 trillion infrastructure law and other federal funding continue at current levels through 2033, that would leave a gap of $2.9 trillion, covering about 60% of the needs.

The report notes that the current infrastructure law enacted in 2021 and the Inflation Reduction Act enacted in 2022 have helped stop the gap from continuing to grow, but changes since 2020 have hindered its expected achievements. Those hindrances for transportation infrastructure include a 27% drop in public transit ridership and a 15% rise in private car trips. Both changes are due to more stay-at-home or hybrid work arrangements.

Prices Continue to Rise for Contractors

The Associated General Contractors reported May 14 that nonresidential construction material prices rose .4% in April – growing faster than bid prices.

Contractor bidding prices rose .1% during the month, AGC says.

The association also warned that material prices could continue to rise for highway contractors under an FHWA proposal to tighten Buy America law requirements. The agency wants to “roll back a longstanding waiver from these requirements for most manufactured products permanently incorporated into federal-aid highway projects,” AGC says.

AGC and the American Road & Transportation Builders Association recently released survey results that showed 69% of contractors who responded plan to increase their bid prices to factor in the uncertainty of material costs and the availability of Buy America-compliant materials.

“Prices for construction inputs have risen faster than contractors’ bids every month so far in 2024,” says AGC Chief Economist Ken Simonson. “In addition, persistently long lead times for electrical equipment are adding to the cost of many building and infrastructure projects. Meanwhile, inflexible rules for sourcing materials could drive up prices for federally aided projects such as highways.”