Dive Brief:
- Construction input prices rose 1.4% in February, mainly due to lingering inflation, according to the new analysis by builders and associated contractors of producer price index data from the US Bureau of Labor Statistics released Thursday.
- The bad news is two-fold for contractors, said Anirban Basu, ABC’s chief economist. First, higher input prices usually lead to lower demand for construction services. When combined with project financing costs, project owners are less likely to proceed with construction work due to high and rising input costs.
- Second, recent inflation data suggest a higher likelihood of prolonged high interest rates, Basu said. Rising borrowing costs would slow construction activity, especially for privately-led projects.
Diving knowledge:
Most of the increases in the producer price index have occurred over the past two months, said Ken Simonson, chief economist for the Associated General Contractors of America.
He added that public officials and private property owners may be underestimating how much the cost of building materials has risen over the past four years since the pandemic upended the economy.
“Even with last year’s milder increases, the nonresidential construction input price index is up 39% since February 2020,” Simonson said. “That’s almost double the 20% increase in the consumer price index.”
February’s increase marks the second consecutive month of price jumps, suggesting a turbulent landscape for the construction industry. Overall construction costs remain 1.5% higher than a year ago, while non-residential construction input prices also rose 1.8% over the past 12 months.
Basu expects this dynamic to continue for the foreseeable future.
“Over the past few weeks, inflation data has come in hotter than expected,” Basu said. “With supply chains around the world shaken by military conflicts and other phenomena and workers’ wages much higher than before, there is reason to believe that inflation will remain stubbornly high for the coming months.”
Brick and tile prices rose 2.6% in February and are up 4.6% from last year. Meanwhile, crude oil and steel mill products also rose 7.5% and 2.9% in February, respectively, according to the US Bureau of Labor Statistics.
Federal Reserve Chairman Jerome Powell said earlier this month that he expects the Fed to begin doing so cut borrowing costs at the end of the year if price pressures remain on a steady downward trend.
But because of persistent inflation, Basu said those forecasts may have been too early.
“For weeks, the conventional wisdom has been that the Federal Reserve was poised to cut interest rates,” Basu said. “Today’s inflation data, along with other communications, suggest that hopes for rapid rate cuts were somewhat premature.”
