A slide in energy costs provided producer price relief in October, the Associated General Contractors of America said.
However, the association says that there is still a huge gap between construction materials prices and the low inflation rates in most of the economy,
“Plunging petroleum prices drove down the overall producer price index for the second straight month and lowered the PPI (producer price index) for construction materials and components for the first time since Hurricane Katrina struck in August 2005,” said Ken Simonson, chief economist for the AGC. “The PPI for finished goods dived 1.6 percent for the month and for the 12 months back to October 2005. The PPI for construction materials and components slipped 0.2 percent for the month but had a year-over-year increase of 6.5 percent.”
Simonson also said that the 12-month increase for many construction products was lower than in recent months, especially compared with the immediate post-hurricane period and to fast-shrinking demand for homebuilders.
Aside from wood products and diesel fuel, most materials still had large year-over-year increases. Simonson said that from October 2005 to October 2006, there were double-digit increases in the PPI for copper and brass mill shapes, which were up 64 percent. Asphalt paving mixtures and blocks were up 30 percent, while steel mill products were up 31 percent and aluminum mill shapes were up 12.5 percent.
“Moreover, two factors make future construction cost explosions likely,” said Simonson. “First, the industry must generally use a fixed quantity of materials, unlike manufacturers that can make products smaller and lighter, or service businesses that use few materials. These materials are often in high demand worldwide, with limited supplies.”
A current example, according to Simonson, is nickel, which is used to make stainless steel. Also, materials must be physically delivered, making them subject to high freight and fuel costs.
“I expect construction materials costs over the next year to rise at least 6 to 8 percent, versus 2 to 4 percent for the overall economy,” said Simonson.
A broadcast discussing construction materials costs has been posted at the AGC Web site,www.agc.org/podcast.