Area Economy

Construction input prices continue their ascent

July 22, 2016
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Construction input prices expanded in June, rising 1.1 percent on a monthly basis, according to an analysis of the Bureau of Labor Statistics Producer Price Index.

This marks the fourth consecutive month that input prices have expanded, following eight straight months of decline.

Commodity prices stabilized in March and in many cases, including for natural gas and oil, have been edging higher. Accordingly, construction materials prices are now on the rise, which — all things being equal — translates to smaller profit margins. Alternatively, rising costs of construction may be passed along to owners of projects in certain instances.

The inflationary impacts of rising materials prices coincide with a deepening skilled construction workforce shortage and a falling industry unemployment rate. The possibility that construction will become meaningfully more expensive on a per-unit basis over the next year may induce more developers to move their projects forward to minimize the impact of rising prices. Indeed, the Architecture Billings Index has been positive in recent months, signaling an active commercial construction market.

However, commodity prices appear to have flattened recently after rising for much of the spring. The implication is that construction input prices will not continue to rise at the pace observed in June, although stakeholders should not anticipate significant input price declines either.

Despite the recent turnaround in input prices, construction materials prices collectively remain 2.5 percent below their year-ago level. Nonresidential construction input prices expanded 1.2 percent in June but are still 2.6 percent beneath their year-ago level. Price gains were largely driven by crude petroleum prices and unprocessed energy materials prices, which expanded 17 percent and 8.3 percent for the month, respectively. Iron and steel, nonferrous wire and cable and natural gas were the only segments to experience price declines for the month.

Anirban Basu is chief economist with Associated Builders and Contractors.

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