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Greater input cost growth has driven FM contracts higher, especially for hard services

The sustained imbalance between input and final costs likely means service providers will try to recoup the previous years’ losses in future contracts.

Input cost indexes measure the materials, supplies and other costs incurred by a business to fulfill a good or service. Final costs (or the contract price) is the price paid by the end-consumer for that service. In normal periods, price changes are fairly aligned across inputs and final cost, but the trend decoupled at the onset of the pandemic, as supply chain disruption led to higher input costs and delays for materials. Service providers increased their prices significantly, but there was a limit to how much they could charge consumers, and if contracts were in place, they were unable to change the price until after the contract expirations.

Over the past year, input prices have stabilized, falling for a brief period and now rising more in line with final costs. For hard services, the imbalance was much more pronounced, which led not only to higher price inflation in 2022 but means disinflation will likely take some time. Some decoupling exists for soft-service contracts, but it will likely take less time to pass through given its relative mildness, meaning disinflation should occur more rapidly in the next couple of years.

Figure 18: U.S. PPI (2019=100) by FM cost component, input vs. output


Source: Bureau of Labor Statistics PPI, Data through April 2023.

Figure 19: Average annual growth rates for U.S. contract costs by FM cost component


Source: BLS CES & PPI, Oxford Economics, CBRE Strategic Investment Consulting, Data through Q1 2023.

Supply chain pressure has eased significantly but price inflation will take time to slow

In 2021-2022, labor shortages, port congestion and equipment and material availability caused severe supply chain disruption, which impacted input prices.

Hard services were especially impacted during this period, since electronic components and electrical/HVAC equipment were in extremely short supply. Food and gasoline were also major factors for all types of FM services.

While the macro supply chain pressure has decreased globally, certain issues remain in spots. Logistics bottlenecks have largely been resolved, but logistics costs remain elevated, and labor issues continue to impact the efficient movement of goods. Plastic and electronic components remain in short supply, and demand has been difficult to predict around the globe. Also difficult to predict are environmental and weather disasters that threaten the supply chains and could cause more frequent disruption in the next few years.

As many facilities convert to more energy-efficient systems, the shortage (and subsequent price inflation) of semiconductors, lithium and other battery-storage components will impact availability and cost. Increased demand amid a global energy crisis is also driving up prices and lead times for these products.

Figure 20: Global Supply Chain Pressure Index


Source: Federal Reserve Bank, Data through May 2023.
Note: Y-axis measures the number of standard deviations from the historic mean.

Figure 21: Average annual % change in CPI by location


Source: Oxford Economics, CBRE Strategic Investment Consulting, Q2 2023.
Note: Table sorted by region, then 2023 figure (descending). Color denotes year of peak inflation.

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