The construction price index tracks inflation and measures the cost of consumer goods, with the construction industry being an indicator of a country’s overall economy. It has numerous segments, and economists use it to look at individual pieces of building material that may be the source of inflationary cost increases. Long-term inflationary swings can be the result of hyperactive governments in a certain industry.
A construction price index measures the change in the cost of newly built homes and the individual assets used in construction. Like other price indices, the purpose here is to track inflation and measure the new cost of consumer goods. In many cases, construction is an indicator of a country’s overall economy. This industry tends to grow and contract before others. When prices rise sharply due to inflation as measured by the construction price index, construction companies slow down, and this can be an unofficial sign of economic contraction.
The construction industry generally has numerous segments when reviewed from an economic point of view. The two largest groups are commercial and residential construction. Below these groups, there is a warehouse, school, office and manufacturing building in the commercial section. Residential subgroups include single-family, multi-family, and investment properties, among other particular groups. Economists typically track a construction price index for the two broad groups and the subgroups in each major category.
Inflation is a natural phenomenon in an economy. Prices rise as demand increases or whenever a central bank or other government agency changes monetary policy, such as the money supply or credit terms. The construction price index often compares the current year’s cost of new construction to the previous year. The percentage increase reported by the index indicates the amount of inflation directly related to construction. The index reports a different figure for each section of the construction industry, at least in terms of the types of buildings built.
Economists can also use a construction price index to look at individual pieces of building material that may be the source of inflationary cost increases. For example, free market economies may experience a shortage of resources as construction of new buildings increases. Interested persons often want this information to determine if the cost increase is due to one or more individual factors. Individual factors can result in short-term price changes. Once more supply enters the market, the cost of construction should decrease as reported by the Construction Price Index.
Long-term inflationary swings can be the result of hyperactive governments in a certain industry. For example, changes in regulation or economic policies may increase the cost of doing business. The Construction Price Index reports these changes annually. Construction costs will not go down until these changes are reversed. Other times, lower demand and less construction can change building inflation, as fewer houses built can lower costs.
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