Construction materials prices increase in January

February 22, 2010
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Prices for construction materials and supplies were up 1.3 percent in January, according to the Feb. 18 producer price index report by the U.S. Labor Department. Year-over-year, construction materials prices are up 1.6 percent.

Iron and steel prices jumped 4.7 percent for the month and are up 5.9 percent since last January, the first year-over-year increase since November 2008. Nonferrous wire and cable prices went up 0.7 percent since December and are up 25.1 percent since January 2009. Prices for softwood lumber increased 0.6 percent last month and are up 8.0 percent since the same time last year.

Prices for plumbing fixtures and fittings had a slight increase of 0.3 percent on a seasonally adjusted basis and are up 1.1 percent since January 2009. Fabricated structural metal products prices also had little change as they increased 0.2 percent for the month, but are still down 7.1 percent from prices one year ago. Prepared asphalt, tar roofing and siding prices slid 2.0 percent for the month, after a 5.2 percent increase in December. Year-over-year, prices are down 5.0 percent. Crude energy prices surged 16.8 percent in January as prices for natural gas jumped 25.5 percent. Overall, the nation’s wholesale prices increased 1.4 percent since December and are up 4.6 percent since January 2009.

This report represents an inflationary shot across the bow, consistent with the view that inflation is a part of our near-term future.

While the monthly increase in PPI was motivated in large part by an increase in energy prices, it is generally thought that monetary policymakers are more focused on core inflation at the wholesale level, which excludes food and energy costs.

However, the increase in construction material prices will impact core items such as housing costs, a fact of which the Federal Reserve is undoubtedly aware. In other words, today's report makes Federal Reserve monetary tightening during the first half of the year more likely than it had been.

The increase in materials prices is not good news for nonresidential construction contractors hoping for a rebound in commercial and other forms of construction in the near term, since rising materials prices make projects more expensive and unpredictable to bid, and thereby reduce the estimated rate of return on investment.

Anirban Basu is chief economist for the Associated Builders and Contractors.

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