Input price surge signals bumpy road ahead

Dive Brief:

  • Construction input prices increased 1.4% in February predominantly due to lingering inflation, according to new Associated Builders and Contractors’ analysis of U.S. Bureau of Labor Statistics Producer Price Index data released Thursday.
  • The bad news is twofold for contractors, said Anirban Basu, ABC chief economist. First, higher input prices generally lead to lower demand for construction services. When combined with already pricey project financing costs, project owners are less likely to proceed with construction work due to the high and increasing input costs.
  • Second, recent inflation data suggest a higher probability of prolonged elevated interest rates, said Basu. Heightened borrowing costs would slow construction activity, particularly for privately led projects.

Dive Insight:

Most of the producer price index increases have occurred over the past two months, said Ken Simonson, chief economist at the Associated General Contractors of America.

He added public officials and private owners may be underestimating how much the cost of construction materials has risen over the past four years since the pandemic upended the economy.

“Even with the milder increases last year, the price index for nonresidential construction inputs has climbed 39% since February 2020,” said Simonson. “That’s nearly twice as much as the 20% rise in the consumer price index.”

The February increase marks the second straight month of price jumps, suggesting a turbulent landscape for the construction industry. Overall construction costs remain 1.5% higher than a year ago, while nonresidential construction input prices also gained 1.8% during the last 12 months.

Basu expects that dynamic to stick around for the considerable future.

“For the last several weeks, inflation data have been coming in hotter than anticipated,” said Basu. “With supply chains around the world rattled by military conflicts and other phenomena and workers’ wages far higher than they once were, there is reason to believe that inflation will remain stubbornly high for months to come.”

Brick and tile prices jumped 2.6% in February and remain up 4.6% since last year. Meanwhile, crude petroleum and steel mill products also both increased 7.5% and 2.9% in February, respectively, according to the U.S. Bureau of Labor Statistics.

Federal Reserve Chair Jerome Powell said earlier this month he expects the Fed will begin to trim borrowing costs sometime later this year if price pressures remain on a steady downward trend.

But due to lingering inflation, Basu said these forecasts might have been too early. 

“For weeks the conventional wisdom has been that the Federal Reserve was poised to reduce interest rates,” said Basu. “Today’s inflation data, along with other releases, suggest that hopes for rapidly declining rates were somewhat premature.”

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