The collapse of the worldwide surge in commodity prices held construction materials prices steady in August. This is the change from the second week of July to the second week of August. Since then, commodities prices have fallen further, especially oil. Some construction steel prices are still rising although prices for flat rolled steel for consumer products are now declining. The September Producer Price Index to be released on October 15th is likely to record a small decline in the construction materials price index.

Speculators no longer like the odds of rising commodity prices in a softening world economy and now increasing supplies in response to the earlier price surge. Speculators are leaving the commodities market quickly, often with big losses. Several commodity hedge funds have been bankrupted. This will keep speculators cautious for the next year and reduce price volatility. The near-term trend is for falling commodity prices in a weaker world economy. But longer term, commodity prices are likely to rise relative to other items in the overall price index because of surging demand in newly industrializing countries.

Construction Materials Inflation – August 2008

Source: Producer Price Index, Bureau of Labor Statistics,
US Department of Labor, Federal Reserve Board, Census Bureau

The price index increased 6.6% from May to July and 12.7% in the last year. For comparison the 2004 price surge was 6.1% in the first seven months of that year. the 2004 price surge was boosted by a falling dollar while the 2008 price surge was cushioned by as rising dollar but boosted by soaring freight costs.

The only large August price increases were for asphalt for paving mixtures (21%), asphalt roofing (9%), paint (7%), builders’ hardware (6%) and gypsum products (5%). Each of these results from higher oil or steel prices a few months earlier so the inflation pace will ebb quickly. The most significant August price decline was for diesel fuel (-19.8%).

The overall construction materials price index is forecast to increase 10% this year and 5-6% next year.

This is exactly what happened in 2004-05. The earlier surge in inflation ended when suppliers eventually caught up with the rapid rise in commodity demand that began late in 2003. The current inflation surge is more likely to end when high prices in a weakening world economy cause a drop in demand.