Construction input prices could continue to rise over next 6 months, says ABC

Construction input prices could continue to rise over next 6 months, says ABC

Construction input prices are 24.3 percent higher than a year ago, while nonresidential construction input prices increased 23.9 percent over that span.

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Elevated construction input prices are not expected to end anytime soon, with prices increasing 4.6 percent in May compared to the previous month.

According to an Associated Builders and Contractors (ABC) analysis of U.S. Bureau of Labor Statistics’ Producer Price Index data, construction input prices are 24.3 percent higher than a year ago, while nonresidential construction input prices increased 23.9 percent over that span.

Similar to last month, all three energy subcategories registered significant year-over-year price increases. Crude petroleum has risen 187 percent, while the prices of unprocessed energy materials and natural gas have increased 100 percent and 90 percent, respectively. The price of softwood lumber has expanded 154 percent over the past year.

“While global supply chains should become more orderly over time as the pandemic fades into memory, global demand for inputs will be overwhelming as the global economy comes back to life,” says ABC Chief Economist Anirban Basu. “Domestically, contractors expect sales to rise over the next six months, as indicated by ABC’s Construction Confidence Index. This means that project owners who delayed the onset of construction for a few months in order to secure lower bids may come to regret that decision.”

According to Basu, many economists continue to believe that the surge in prices is temporary and is the result of an economic reopening shock.

“To a large extent, [the economists] are correct,” he says. “The cure for high prices is high prices. When prices are elevated, suppliers have greater incentive to boost capacity and bolster output. That dynamic eventually results in a downward shift in prices. Operations at input producers should also become smoother over time as staff is brought back and standard operating procedures are reestablished.”

However, there are some factors that have changed during the pandemic that will not immediately shift back, such as money supplies.

“Governments have been running large deficits. This means that some of the inflationary pressure that contractors and others are experiencing may not be temporary, and that inflation and interest rates may not be as low during the decade ahead as they were during the decade leading up to the pandemic,” says Basu.