The producer price index for building materials and supplies soared 24.9 percent over the 12 months that ended in March, and is up 58.6 percent since January 2020, just before the start of the pandemic. Higher costs for steel mill products, diesel fuel, plastic construction products, paint, lumber, trucking and tires all helped push the index higher. Another measure of cost increases for public and road works projects, the National Highway Construction Cost Index, climbed 10.8 percent between the third quarter of 2020 and the third quarter of 2021, according to the most recent available data. That doesn't include the recent surge in oil prices due largely to Russia's war on Ukraine, which is expected to push the figure even higher. What does it mean for public sector projects? Sponsors could see higher bids from contractors, larger contingencies in new contracts to account for unexpected increases in materials costs, and a shift away from fixed-price contracts, S&P's Kurt Forsgren, Geoffrey Buswick and Joseph Pezzimenti said. "As construction input inflation increases or remains elevated, the purchasing power of federal investment – as well as other funding sources – is eroded," they wrote. In short, the funding may not provide as much bang for the buck as lawmakers thought last year, when they passed the law. The key question: How do state and local governments respond to price pressure? Most federal funding requires state and local governments to provide a matching contribution for infrastructure projects. Some project sponsors may be able to compensate for higher costs by tapping into their general funds – which have been bolstered in recent years by federal stimulus dollars and higher tax revenue — or raising tolls or other taxes. "The longer more elevated inflationary conditions persist, the more likely it is that public project sponsors will face the dilemma of reducing or delaying the promised overall program project scope or tapping other sources of program funding, including increased debt," they said. Heightened uncertainty — Trying to determine the next step is exceptionally difficult now, as the war in Eastern Europe and the prospect for aggressive interest rate increases by the Federal Reserve have clouded the near-term outlook. Fed and White House officials, as well as economists on Wall Street, expect price pressures will start to ebb this year — some have speculated that inflation has already peaked — but many see inflation remaining elevated through the end of 2022. That forecast could turn out worse than expected if, say, supply chain disruptions persist or energy prices rise further. Higher interest rates also mean higher borrowing costs for projects than officials expected even just a few months ago, prompting some to consider moving faster to lock in financing now, before rates rise even further, said Seth Lehman, senior director at Fitch Ratings Inc. Lehman said he doesn't expect higher inflation will stall many projects. But he added, "People are questioning, are the numbers that people are throwing out in terms of capital budgets and costs for projects, are they really realistic now." "Projects oftentimes take two, three, four years to build, and you kind of make an assumption about what the [price] escalation will be," he said. "And if you're miscalculating that, or your calculations have to be measurably adjusted, all of a sudden the price tag goes higher. And do you have all the funding now in place that you thought you had only a few months ago?" IT'S WEDNESDAY — No really, apparently it is only Wednesday. We're as surprised as you are. Have tips, feedback or other life hacks for making it through the rest of this week? Please send them our way: kdavidson@politico.com or @katedavidson, and aweaver@politico.com or @aubreeeweaver.
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