Construction Materials Price Index Rises 2.0% in March

Savannah Selle
July 24, 2011

Big jumps in diesel and other energy based products plus gypsum, aluminum and steel products and smaller rises in concrete products caused a 2% rise in the construction materials price index in March from February. The Index is up 4.0% in the last three months and 6.8% over the last year. The March gain brought the index above the previous peak level in September 2008.

However, the March report shows that the commodity price surge is beginning to ebb, at least temporarily. Copper prices have not yet retreated from the record high level but nonferrous product prices plunged 9.8% in March. Overall, construction commodity prices rose only 1.1% last month.

The inflation set off by rising commodity prices in a rapidly growing world economy as well as a weakening $US continues to spread slowly into the pricing of domestic products that had been insulated for several years from international inflation pressures. Gypsum product prices increased 7.0% and cement and lumber prices were both up 0.8% after several years of decline. The gypsum price increase is a periodic price adjustment by manufacturers. It sets a new price level but not a new trend to sustained price increases over an extended period.

Overall inflation in the economy has also turned up. The CPI rose 0.5% in March and the Producer Price Index (PPI) increased 0.7%. The consensus outlook for rising inflation is beginning to creep into credit costs in spite of continuing simulative efforts by the FRB to restrain borrowing rates. 10-Year Treasury bill rates — the base rate for many mortgage loans — are 50 basis points higher than six months ago and still rising. Higher materials prices and borrowing costs are putting further downward pressure on contractors’ margin in a depressed construction market.

The slowdown in US GDP growth to near 2% in the first quarter restrained the rise in inflation by weakening inflation pressures on products priced in the domestic market. But world economic growth has not slowed from a 4.5% annual pace. The slowdown in the US was offset by more rapid growth in large developing countries so inflation pressures have not lessened in world commodity markets.

After a pause around yearend, the $ US has resumed falling in currency markets at about a 6-7% annual rate. Financial markets are betting on further rapid rises in US inflation from the combination or a weaker dollar and an expanding economy. The exchange value of the dollar is also being edged down by concern about a possible delay in raising the US debt limit which will be hit in 4-6 weeks.

Short term, the impact of reduced commodity buying in Japan will moderate inflation pressures into the summer. This restraint on inflation will be brief and offset later this year by a flurry of Japanese orders for rebuilding.

Handle Your Business

Fresh Views of Your Business