Three Ways Inflation May Impact Future Transportation Choices

Inflation. It’s a simple, three-syllable, nine-letter word, yet right now, it feels nine trillion times worse than the four-letter words society bristles at and shuns. And, speaking of four-letter words, consumers, commuters, and state and local governments are all saying plenty while paying for anything from groceries, gas, or a rideshare ride to goods for municipal projects and development. Also not to be forgotten in causing the likely increase in the uttering of four-letter words are interest rates, which have risen and will continue to rise to help quell inflation by increasing costs further to (hopefully) cool consumer and other demands on the ever-shortening supply chain. Those two culprits (inflation and rising interest rates) are causing serious individual and collective fiscal pain, but the impact they are having and will continue to have on transportation may be the most immediately noticeable and have the most long-term impact.

First, the average price for a gallon of gasoline in the United States continues to rise. Following the paths that some governors have proposed and taken, President Biden has championed a federal gas tax holiday. Some legislators have spent months rejecting such proposals because gas taxes fund multiple transportation infrastructure projects and ultimately incentivize consumers to switch to cleaner energy transit options. Surprisingly, gas prices still haven’t forced people out of their cars as a record number of Americans (many of whom have been cooped up for over two years because of the pandemic) plan to hit the road this July 4th holiday. In contrast, public transit ridership has generally not yet returned to pre-COVID levels. In the end, consumers will just have less cash to spend, which should cool down consumer demand for the numerous goods in short supply since, presumably, at some point, consumers will not be able to afford them.

Second, ride-hailing has been and will continue to rise in cost due to factors beyond increasing labor and fuel costs. Rising interest rates and a volatile stock market have handcuffed startups and pre-profit tech companies because the cheap money they previously could raise instantly has nearly disappeared. As a result, rideshare companies that may have subsidized ride costs for consumers for most of the past decade are now reflecting their actual costs in pricing. Gone are the days when a rideshare ride would be astronomically cheaper than a taxicab and nominally more expensive than public transit for short trips. This is especially true as more transit agencies and local governments are offering or considering offering free transit rides to lure riders back onto their systems and into downtowns. Of course, free transit rides will negatively impact transit system operations that rely partly on ticket revenue. However, many public transit systems are already impacted by the lack of riders. If consumers continue to shun public transit and use ridesharing, they will have less cash in their wallets for non-essential purchases, which should help cool down demand for the numerous goods in short supply and, ultimately, reduce inflation.

Third, and perhaps the most long-term impact of inflation on transportation is the toll on infrastructure projects across the U.S. Inflation is driving up costs so much that state and local officials are planning to or considering postponing infrastructure projects, scaling back others, and reprioritizing their immediate needs.  The price hikes are driven by a variety of factors, including worldwide supply-chain backlogs, white-hot consumer and business spending in the U.S. as a result of quantitative over-easing, and the ongoing war in Ukraine, among others.

Local and state governments can issue tax-exempt municipal bonds to finance their ever-more expensive public projects. As a financing mechanism, rather than pay for the building of projects with funds as they are received (which can take many years and is known as “pay-as-you-go”), local and state governments can issue and sell bonds to either individual or institutional purchasers (or to banks to evidence loans) so they can receive lump sum funding for capital projects. Such issuers promise to repay those bonds over a set number of years with interest. Typically, interest rates on tax-exempt municipal bonds are lower than private-industry corporate bonds since bondholders can retain tax-free interest from the federal and state governments. But, rising interest rates have made borrowing ever more expensive for state and local governments.

And, it is not like local governments can just make ad hoc pay-as-you-go transactions instead of following a planned fiscal budget and securing municipal financing. The cost of doing business (including interest rates, goods, and real estate) has multiplied expeditiously in the last two years because of inflation, and governments can’t accurately predict what those costs will be in the future. As a result, most state and local governments will either have to scale back projects (i.e., build two new roadway lanes instead of four or only one new light rail instead of two) or plan their projects over multiple phases and years. For example, the projected cost of constructing light rail and related improvements in Austin, Texas, nearly doubled in less than two years, causing city officials to consider reducing the project scope or extending the project completion time. This downsizing and delayed delivery would reduce the beneficial impact of needed transportation projects for their residents and visitors.

As terrible of a result as less cash in people’s wallets, more expensive ridesharing, and scaled-back infrastructure projects are, each of those results is needed now to taper inflation. After all, the simplest answer to why inflation is currently soaring is that there is too much demand and not enough supply. If demand continues to soar unchecked, supply will never catch up, and unpredictably high inflation will continue exacerbating woes in transportation.