Analysis of U.S. Bureau of Labor Statistics’ Producer Price Index data by both the Associated General Contractors and Associated Builders & Contractors indicate continued inflation in construction inputs and worrying signals that lead times are growing. Association officials warn of building inflationary pressure on items such as steel, lumber, and other items used in construction.
Construction input prices rose 0.6 percent in July, according to ABC, with nonresidential construction input prices up 0.8 percent for the month. Compared to July 2020, input prices were 23.1 percent higher in July, with nonresidential construction input prices up 23.4 percent.
Inflationary pressure is evident in the price of natural gas, up 146.7 percent, and steel mill products, up 108.6 percent compared to 2020.
“July was the sixth-straight month of double-digit price increases for construction inputs,” said Ken Simonson, AGC chief economist, in a prepared statement. “In addition, lead times to produce or deliver many items keep lengthening. Many reports since the government collected this price data in mid-July show the trend will continue, at a minimum into the autumn and likely beyond, unless tariffs and quotas are removed.”
AGG said that the producer price index for new nonresidential construction—a measure of what contractors say they would charge to erect five types of nonresidential buildings—rose 4.4 percent over the past 12 months, “a small fraction” of the increase in prices that includes service providers such as distributors and transportation firms.
Transportation and fuel costs also spiked, according to AGC. The index for truck transportation of freight jumped 13.8 percent. Fuel costs, which contractors pay directly to operate their own trucks and off-road equipment, as well as through surcharges on freight deliveries, have also jumped.
“One’s definition of transitory needs to evolve with these data,” said ABC chief economist Anirban Basu in a statement. “While it is quite likely that there will be less inflation a year from now, a rebounding economy, ongoing supply chain disruptions and limited productive capacity have conspired to generate rapid price increases. Many economists insist that the current situation is merely temporary; still, today’s input price increases can meaningfully affect contractor fortunes by trimming margins and delaying the onset of projects.
“One can only conclude that the economy will continue to run hot into 2022 despite the malign impacts of the delta variant, producing both hefty advances in gross domestic product and unusually elevated inflation,” Basu said. “The fact that steel prices are rising is not only an indication of the recovery transpiring in goods-producing industries like construction and manufacturing, but also of the difficulty global suppliers are having keeping up with demand. That dynamic does not appear poised to change substantially in the very near-term, though there was some evidence of moderating inflation in the most recent Consumer Price Index report. Contractors should assiduously build contingencies into their contracts to protect themselves from additional materials price spikes. Given that construction firm services are in high demand, contractors should have enough negotiating leverage to accomplish that under most circumstances.”
