Summary

The aggregate price of inputs to construction industries increased 6.5 percent over the past 12 months, according to the May 20 release of the Bureau of Labor Statistics producer price index. Data collected from April indicates that the pace of price increase among construction inputs continues to be uncomfortably rapid, though price increases last month were generally not as rapid as they were in March 2008. Construction input prices rose 1.2 percent in April after rising 2.1 percent in March and 0.6 percent in February. Prices for fabricated structural metal products surged 3.1 percent in April following a 1.0 percent increase the prior month. Price indices for plumbing fixtures, brass fittings and for softwood lumber also moved higher in April. By contrast, prices for nonferrous wire and cable fell 3.1 percent in April after declining 7.9 percent in March. Additionally, prices for fabricated ferrous wire products and asphalt felts/coatings rose less rapidly than they had in March. Construction inflation still remains far less pronounced than during the 2004-2005 period, when overall 12-month construction price increases routinely approached 10 percent.

Producer price index data also reflect recent increases in energy prices. The index for crude energy materials advanced another 4.1 percent in April after registering a 13.4 percent gain the previous month. Between April 2007 and April 2008, crude energy materials prices are up 51.9 percent. Intermediate energy goods are up 25.4 percent over the same period, while finished energy goods prices are up 17.5 percent.

What This Means

According to Associated Builders and Contractors, the commercial and industrial construction industry should be more than a little nervous. For instance, relentless increases in the price of steel are causing project cancellations across the globe. Steel prices internationally are up 40 to 50 percent since December and some industry executives believe that they have yet to achieve their peak. In addition, purchasing agents are under constant pressure to buy now or pay more later. It is now standard for manufacturers of steel pipes, tubes and rebar to guarantee prices for only two weeks.

Meanwhile, massive increases in the prices of copper, nickel, stainless steel and concrete have made it even more difficult for America to construct new nuclear and coal-powered power plants. The inability to add additional energy capacity in a timely fashion means that energy prices will remain higher than they otherwise would have been. In other words, input price inflation begets input price inflation.

As long as the dollar remains weak and the supply of critical inputs remains at risk in key supplier nations, prices will continue to remain elevated. The extent to which these producer price increases will slow the pace of nonresidential construction remains to be seen.