Inflation & Construction Cost Trends 2025 Insights

As we enter 2025, inflation continues to shape the construction industry, driving up material costs, labor wages, and supply chain challenges. While inflation is expected to moderate in some regions, it remains a critical factor affecting project budgets and timelines.

Material price volatility in steel, lumber, and electrical components and labor shortages will be major contributors to rising construction costs. Despite these challenges, there are opportunities for growth if construction professionals adopt strategies to manage costs effectively.

In this research, we explore the global inflation outlook, regional trends, and the key factors influencing construction costs in 2025. We also provide insights on how to navigate these shifts and mitigate the impact on construction projects throughout the year.

Global Inflation Outlook

Global inflation is projected to ease in 2025, although it will likely remain above pre-pandemic levels. Forecasts from various institutions, including the International Monetary Fund (IMF), RSMUS, and Ifo Institute, suggest that global inflation could settle around 4% in 2025. This represents a decline from the peak of 9.4% in the third quarter of 2022.

These factors contribute to this projected decline:

1. The effects of the pandemic on supply chains are gradually unwinding, leading to improved supply and easing price pressures.
2. Restrictive monetary policies implemented by central banks worldwide are starting to take effect.

However, risks to the inflation outlook remain. Protectionist trade policies, particularly in the United States, could lead to higher import taxes and increased prices for goods. If other nations retaliate with similar measures, this could trigger a tariff spiral, further exacerbating inflationary pressures. 

A stronger US dollar could also contribute to inflationary pressures in countries that import oil. Geopolitical tensions and potential conflicts, such as the situation in the Middle East or tensions between China and the U.S. over Taiwan, could further disrupt supply chains and fuel inflation.

Regional Inflation Trends

Regional inflation rates are expected to vary significantly in 2025. According to FocusEconomics, Asia is projected to have the lowest inflation rate, benefiting from its large manufacturing capacity and relatively subdued demand in China. 

The G7 economies are expected to see inflation broadly in line with their central banks' 2% targets In contrast, sub-Saharan Africa is projected to record the highest inflation rate among world regions in 2025.

Latin America and Eastern Europe are anticipated to experience moderately high inflation due to potential currency weakening spurred by interest rate cuts.

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In the United States, inflation is anticipated to slow down, with the Federal Reserve's preferred measure, the Personal Consumption Expenditures (PCE) price index, projected to fall to 2.5% by the end of 2025 . However, services inflation is expected to persist, potentially complicating the Federal Reserve's efforts to normalize monetary policy.

Construction Cost Trends

As inflation continues to influence global markets, construction costs are expected to rise in 2025 driven by a combination of factors, including material price volatility, labor shortages, and supply chain disruptions. JLL's 2025 Construction Outlook expects cost growth to be between 5% and 7%.

In 2025, Lagos (Nigeria) is expected to experience one of the highest construction cost growth rates, while New York City’s costs were forecast to grow by 3.5%, with Paris and Zurich projected to have the lowest growth rates.

Material Costs

Material prices are expected to remain elevated in 2025 due to ongoing supply chain issues and increased demand. While some materials, such as lumber, have seen price declines in recent months, others, like steel and electrical components, remain expensive and subject to volatility. The Producer Price Index for construction materials has increased significantly over the past year.

The Corelogic report shows U.S. material costs dipped -0.4% last quarter but still rose 0.6% year-over-year. In contrast, Canada saw a 0.5% quarterly increase and a 3.0% annual rise, underscoring regional cost differences.

A look at past price trends provides valuable context for understanding where construction material costs might be headed in 2025. While some materials have seen sharp fluctuations over the past few years, others have begun to stabilize, shaping expectations for the year ahead.

Steel:

• In mid-2020, the price of steel rebar was around USD $425 per tons, and it rose to a high of USD $950 per tons in March 2022. As of July 9th, 2024, the price was USD 579.50.  
• As of December 31, 2024, the price of steel was USD $709 per ton.  

Lumber:

• Lumber prices saw a significant increase in 2021 and 2022, reaching highs of over USD 1,500 per thousand board feet.  
• However, prices have since stabilized and are expected to range between USD $450 and USD $600 per thousand board feet in 2025.  
• As of January 29th, 2025, the price of lumber was USD 576.07 per thousand board feet.  

Electrical Components:

• In 2022, the prices of electrical components increased significantly, with some components seeing price increases of 20% to 100%.  
• Factors like increased energy costs and component shortages contributed to these price increases.  
• The Producer Price Index for electrical equipment and appliance manufacturing in the US was 202.03 as of January 29, 2025 doubling from December 2003.

Other Construction Materials Outlook:

• Concrete prices are projected to rise modestly in 2025, with a 1.2% increase year-to-date (as of January), driven by higher cement and aggregate costs and ongoing transportation bottlenecks.
• The global cement market is set for an uneven recovery in 2025, with consumption expected to rise 1-2% excluding China.

Several factors contribute to material price increases. Supply chain disruptions, although less severe than during the pandemic, continue to affect the availability and cost of materials . Geopolitical tensions and trade restrictions, such as tariffs on imported goods, can also contribute to price increases.

Labor Costs

Labor shortages remain a significant challenge for the construction industry, putting upward pressure on wages. The industry needs to hire a substantial number of new workers each year to meet demand, and the shortage of skilled labor is driving up wages.

In addition to these workforce gaps, labor regulations in some regions are further contributing to cost increases as businesses adjust to new compliance requirements.

The forecasted labor costs for 2025 show significant variation across countries, with projections indicating increases in several regions, such as Canada, Turkey, and the United States. Notably, Turkey is expected to experience the highest growth, while the United States and the Euro Area show moderate increases throughout the year.

Supply Chain Factors

Supply chain disruptions, while improving, continue to impact construction costs in 2025. Delays in material deliveries can lead to project overruns and increased expenses. In addition, the unpredictability of supply chains makes it challenging to accurately plan and budget for projects.

Here's a breakdown of how supply chain disruptions impact construction costs:

• Material Availability and Cost: Supply chain delays and bottlenecks can cause material shortages, driving up prices and complicating budget management for construction companies.
• Project Delays: Material delivery delays extend timelines, increase labor costs, reduce profitability, and may lead to contractual disputes and legal issues.
• Increased Transportation Costs: Higher fuel prices and logistical challenges contribute to increased transportation costs, further adding to overall project expenses.   
• Uncertainty and Risk: The unpredictability of supply chains makes it difficult to accurately plan and budget for projects, increasing the risk of cost overruns and financial instability for construction companies.

Strategies to Mitigate Supply Chain Disruptions

To mitigate the impact of supply chain disruptions, construction companies are adopting various strategies, including:

• Building strong relationships with suppliers: This can help secure more favorable prices and improve supply chain reliability.   
• Diversifying supply chains: Establishing alternative supply chains can help mitigate the risk of disruptions from a single source.   
• Using technology to monitor supply chains: Technology can help identify potential disruptions before they occur, allowing for proactive adjustments and mitigation strategies.   
• Value engineering: Exploring alternative materials or construction methods can help reduce costs and minimize reliance on scarce materials.   

Despite these mitigation efforts, supply chain disruptions are expected to remain a challenge for the construction industry in 2025, driving up costs due to material shortages, delays, and rising transportation expenses. These challenges will require construction firms to prepare for adjustments in their budgets and timelines.

Financing Costs

While inflation and construction costs are global concerns, the U.S. market plays a key role in shaping industry trends worldwide. As one of the largest construction markets, changes in U.S. financing conditions can have ripple effects, influencing material prices, labor demand, and investment confidence in other regions.

Mortgage interest rates in the US are expected to decrease gradually in 2025. After reaching highs in 2023, experts predict that rates will dip into the mid-5% range in 2025.

While still higher than rates seen in the 2010s, this decline could make loan-backed construction projects more affordable.

• Current Interest Rates: Interest rates for construction loans currently average 7.5%, up from 5.8% in 2022 . This increase makes financing more expensive and can tighten profit margins for construction businesses.  
• Expected Changes: Experts predict that interest rates will decline in 2025. JLL anticipates a better environment for construction financing with lower rates . JP Morgan forecasts four interest rate cuts next year, with the Federal Funds rate ending 2025 at 3.5% . However, it may take a more significant reduction in rates (125 to 150 basis points) to see consistent growth in the construction market .  
• Impact on Construction Activity: Lower interest rates are expected to stimulate construction activity by making it more affordable to finance projects. This could lead to increased construction loan origination activity for both residential and nonresidential development.

Strategies for Mitigating Inflationary Impacts

Given the persistent challenges of inflation and rising costs, construction stakeholders are adopting various strategies to mitigate the impact on their projects. These strategies include:

• Developing a Spending Strategy: This involves carefully analyzing project budgets, identifying areas for potential cost savings, and prioritizing essential expenditures.
• Fostering Relationships with Suppliers: Building strong relationships with suppliers can help secure more favorable prices and improve supply chain reliability.
• Purchasing Materials in Bulk: When feasible, purchasing materials in bulk can help lock in prices and mitigate the risk of future price increases.
• Maintaining Existing Equipment: Proper maintenance of equipment can extend its lifespan and reduce the need for costly replacements during periods of high inflation.
• Long-term material procurement – Purchasing materials in advance at a fixed price to secure availability, stabilize costs, and ensure project timelines remain intact.

Government Policies and Initiatives

Governments are implementing various policies and initiatives to mitigate the impact of inflation on construction and support industry growth. These include:

• Inflation Reduction Act: In the United States, the Inflation Reduction Act includes provisions aimed at promoting energy efficiency and reducing greenhouse gas emissions in construction 16. This includes grants and technical assistance to help manufacturers and builders adopt low-embodied carbon materials and practices.
• Infrastructure Investments: Governments are increasing investments in infrastructure projects, which can create new construction opportunities while also potentially increasing demand for materials and labor.
• "Buy American" Mandates: Policies like Buy American mandates, which require the use of domestically sourced materials in federally funded projects, could impact construction costs by potentially increasing demand for domestic materials.
• Value Engineering: Governments and industry stakeholders are increasingly emphasizing value engineering, a process of optimizing project designs to reduce costs without sacrificing quality.
• Alternative Materials: The use of alternative materials, such as engineered wood products as substitutes for traditional lumber, is being encouraged to help control costs.

Navigating Inflation, Building Smarter

Inflation and rising costs may set the stage for uncertainty, but construction has always been about problem-solving and resilience. While material prices, labor shortages, and supply chain disruptions create pressure, they also open the door for smarter financial planning, better resource allocation, and more efficient workflows.

By staying informed and adapting to market shifts, construction professionals can stay ahead of inflationary challenges and position themselves for success. 2025 isn’t just about managing costs—it’s about building a stronger, more strategic future.