Cost escalation can be defined as changes in the cost or price of specific goods or services in a given economy over a period. This is similar to the concepts of

inflation In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reductio ...

and

deflation In economics, deflation is a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). Inflation reduces the value of currency over time, but sudden deflation ...

except that escalation is specific to an item or class of items (not as general in nature), it is often not primarily driven by changes in the money supply, and it tends to be less sustained. While escalation includes general inflation related to the money supply, it is also driven by changes in technology, practices, and particularly supply-demand imbalances that are specific to a good or service in a given economy. For example, while general inflation (e.g.,

consumer price index A consumer price index (CPI) is a price index, the price of a weighted average market basket of consumer goods and services purchased by households. Changes in measured CPI track changes in prices over time. Overview A CPI is a statistica ...

) in the US was less than 5% in the 2003-2007 time period, steel prices increased (escalated) by over 50% because of supply-demand imbalance. Cost escalation may contribute to a project

cost overrun A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known ...

but it is not synonymous with it. Over long periods of time, as market supply and demand imbalances are corrected, escalation will tend to more-or-less equal inflation unless there are sustained technology or efficiency changes in a market. Escalation is usually calculated by examining the changes in price index measures for a good or service. Future escalation can be forecast using

econometrics Econometrics is the application of Statistics, statistical methods to economic data in order to give Empirical evidence, empirical content to economic relationships.M. Hashem Pesaran (1987). "Econometrics," ''The New Palgrave: A Dictionary of ...

. Unfortunately, because escalation (unlike inflation) may occur in a micro-market, and it may be hard to measure with surveys, indices can be difficult to find. For example, the

Bureau of Labor Statistics The Bureau of Labor Statistics (BLS) is a unit of the United States Department of Labor. It is the principal fact-finding agency for the U.S. government in the broad field of labor economics and statistics and serves as a principal agency of t ...

has a price index for construction wages and compensation (what the construction contractor's labor cost), but has none for the prices that owners must pay the construction contractor for their services.{{cite news , date=2014-01-03 , url=http://www.eks-construction.co.uk, title=Specialist Groundworks Contractors, publisher=Construction Group Association , author=Paul Henssen, accessdate=2015-07-24 In

cost engineering Cost engineering is "the engineering practice devoted to the management of project cost, involving such activities as estimating, cost control, cost forecasting, investment appraisal and risk analysis". "Cost Engineers budget, plan and monitor inve ...

and

project management Project management is the process of leading the work of a team to achieve all project goals within the given constraints. This information is usually described in project documentation, created at the beginning of the development process. Th ...

usage, escalation and

cost contingency When estimating the cost for a project, product or other item or investment, there is always uncertainty as to the precise content of all items in the estimate, how work will be performed, what work conditions will be like when the project is execut ...

are both considered risk funds, that should be included in project estimates and budgets. When escalation is minimal, it is sometimes estimated together with contingency. However, this is not a best practice, particularly when escalation is significant."Escalation Estimation: Working With Economics Consultants", John K. Hollmann; Larry R. Dysert, 2007 AACE International Transactions, AACE International, Morgantown, WV, 2007

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See also