As soon as you got your construction cost estimating adjusted to incorporate the soaring materials prices from January through June, the commodity price surge began to collapse. Prices have fallen about 20% in a few weeks for crude oil, natural gas, nonferrous metals and many farm commodities. Steel price increases at the mill have stalled although nominal posted prices keep rising. Your actual costs in the next few months are likely to be less than your most recent estimates, especially if you had projected the rapid pace of inflation to continue.

How did this happen so fast? All of the factors that drove prices up quickly early in the year has either stabilized or reversed. The depreciation of the $US ended with anticipation of economic stimulus driven interest rates cuts in other major countries where economic activity has abruptly slowed. That makes low US interest rates more attractive and draws in footloose capital from around the world, bidding up the value of the $US. The $US has appreciated 6-7% against the Euro and other major currencies which makes $US imports less expensive. The impact is immediate for commodity prices set in US dollars.

At the same time, record high economic growth in the rest of the world has subsided. This is partly in response to fewer exports orders from US buyers but also reflects efforts to rein in soaring inflation. Recently, the inflation pace neared a 10% annual rate in china and India. The consensus outlook for Chinese economic growth has now dropped to about 8% from the 12% pace last year. This decline will have a magnified impact on investment in developing countries and an even more magnified impact on near term materials demand while surplus inventories are worked off. Some China watchers believe that factory production in China may decline in July or August.

Also, suppliers have caught up with the surge in demand from 2006 until June 2008. This is exactly what happened in 2004. Construction materials prices surged at a 15% annual pace from January through August and then were unchanged over the next year. It takes a few quarters to a few years but suppliers always produce more of products whose prices rise relative to their production cost. In recent months the world has more ore, scrap, metal processing facilities, farm products, natural gas and, in the next few months, more crude oil.

Finally, the impact of speculative buying has reversed. Speculators aggravate prices rises when there are fundamentally sound reasons that prices should rise. But when the demand-supply balance reverses, speculators aggravate price declines as the scramble to sell and cut their losses. $30-40 of the record high $147 oil price was likely speculative.

Nonetheless, the next Producer Price Index report, for July, from the Census Bureau on August 19th will show another big rise in the construction materials price index since the survey was done early in July. Than the inflation pace for August and September will be much lower. The index may possibly decline briefly in the fall as recent energy based surcharges for raw materials and freight are reversed.