Area Economy

Inflation and interest rate environment changing

November 25, 2016
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Construction input prices remained unchanged in October and are just 0.5 percent above where they were a year ago, according to analysis of the U.S. Bureau of Labor Statistics Producer Price Index released recently.

Despite the modest increase in the aggregate input price level, the October report represents the largest year-over-year price increase since November 2014.

Generally, construction input prices, particularly natural gas and crude petroleum, have headed lower since the summer of 2014. However, that pattern of falling prices no longer holds.

Crude petroleum prices were up 10.5 percent on a year-over-year basis in October, while natural gas prices were up 12.2 percent.

These data are part of a larger inflation story, as inflationary pressures largely have been tempered by the decline in fuel prices during the past two years. Health care costs are spiking, wage pressures are building and fuel prices no longer are falling rapidly. Additionally, price increases are associated with the cost of housing and education.

The result is the inflation and interest rate environment is steadily changing. Promised infrastructure-led stimulus and tax cuts could create additional price pressures, as workers’ compensation rises further and consumer spending helps bid up the price of goods and services more rapidly. At the same time, fewer restrictions on oil and natural gas production may limit fuel price increases.

The result is a complicated picture in which the price of certain inputs — such as iron, steel, copper, plumbing fixtures and nonferrous wire and cable — begin to rise more rapidly during the coming months, while fuel price increases remain stable.

Broader inflation in the United States has become more likely, an expectation that has been reflected in the form of higher interest rates since the recent election.

A still sputtering global economy will help put a lid on construction input price inflation, however, suggesting contractors should not be deeply concerned by prospects for rapid input price increases, at least not yet.

Anirban Basu is chief economist for Associated Builders and Contractors.

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