Construction materials price inflation eased to a 0.2% monthly increase in December largely due to a 5% drop in diesel prices. However, diesel prices have increased $0.12/gal. since the December survey week so a larger overall rise in the price index is likely in January. The construction materials price index is only 0.5% above last December and declined 4.1% for all of 2009 versus 2008.

Ahead, the trend is for price increases in 2010-11 well above overall inflation in the economy. The transition to another period of progressively rising materials prices has already begun. The price index increased at a 2.5% pace in the last three months. Lumber, asphalt products and nonferrous metals price all gained about 4% in the final quarter of 2009.

The key price driver in the next six months will be higher imported commodity prices due to the depreciating $US and the sharp rise in demand for commodities by foreign contractors and manufacturers. A new round of Chinese commodity stockpiling is already underway. Late this year and in 2011 rising US construction activity will begin to add inflationary pressure. This 2010-11 impact from higher demand is expected to be smaller than the large price spikes in both 2004 and 2008 because subpar economic growth will keep the construction recovery relatively modest. Nonetheless, expect some price spikes ahead lasting as long as six months as suppliers, as always, are slow to react to rising demand. This year the risk of price spikes is highest for metals. The risk of price spikes is also significant late this year and in 2011 for lumber, gypsum and concrete products.

Other than diesel, the only significant December price drop was the 1.4% fall in flat glass prices. This was an outsized price change in this normally steady market. The drop reflects the continuing decline in nonresidential building starts, the deep drop in contract prices for natural gas and a rebound from a brief November boost in prices. Nonferrous metals (+10.0%), asphalt roofing (+5.2%) and softwood lumber (+3.8%) were the only significant price increases in November. More, but slower, price gains are ahead for each these items.