Construction Forecasts

Construction Materials Price Index Rises 1.4% in April

The surge in construction materials prices continues to ebb with the monthly gain in April falling to 1.4% from 2.0% a month earlier. World commodity prices have dropped sharply since the price survey week (2nd week of April) so monthly materials price inflation is expected to weaken further in the next few months.

The significant price increases in April were diesel fuel (5.7%), nonferrous pipe and tube (3.5%), structural steel (3.2%), softwood plywood (2.8%) and plastic resins (2.6%). The jump in plywood prices is unrelated to the world commodity situation and is not a sustainable trend. The metal price spikes are spillover from previous huge ore and scrap price gains. More price rises may be ahead for a few months but at a slower pace. Similarly, the diesel and plastic resin price increases come from the sharp rise in crude prices earlier in the year. Crude prices have fallen $16/bbl. since the price survey week and diesel prices have been steady at $4.10/ gal. Next months report will show diesel prices steady to slightly down although resin prices may rise slightly more.

The only significant price declines in April were a 4.9% drop in gypsum product prices, partially reversing a large periodic price rise the previous month and a 1.5% drop in softwood lumber prices in response to unexpectedly weak winter construction activity. Current futures market prices suggest that weakening lumber prices will persist for a few more months.

Overall inflation in the economy remained high with a 0.8% gain in the April Producer Price Index driven largely by energy and food prices. The price index rose 0.3% excluding energy and food to 2.1% above a year ago. The spike in energy and food prices is now boosting prices for all items in the index via freight rates, fuel surcharges and higher business operating costs. The low inflation window that the FRB has relied on for leeway to pursue aggressively easy monetary policy is now closing. The FRB is counting on the commodity price surge easing enough to permit cheap credit policies to be pursued for another 2-3 quarters before the risk of spurring inflation becomes too great. This is a close call. It may not be possible.

Construction inflation will probably dip below overall inflation in the next few months but will be back above the overall inflation pace in the second half of the year because of the high share of commodity imports in the construction material price equation. World economic growth remains close to 4.5% and the $US had resumed depreciating.