Associated Building Contractors Reports Construction Input Prices Increased 2.5% in January

A closer look at the U.S. Bureau of Labor Statistics’ Producer Price Index (PPI) data for January, provided by the Associated Builders and Contractors (ABC), reveals that residential construction input prices increased 2.5% in January over December 2020. Year-over-year residential input prices increased 4.8%. Nonresidential construction input prices rose 2.1% in January and when compared to a year ago they are 4.2% higher. Leading the price increases are softwood lumber pricing, which is up 73% year-over-year, followed by natural gas — up 30% over the past the year. Iron and steel prices are up 15.6% in the same time frame. ABC’s Chief Economist Anirban Basu offers some insight. He said, “They say the cure for low prices is low prices. Early in the COVID-19 pandemic, several key commodity prices declined substantially, causing a diminished incentive for suppliers to invest in capacity augmentation. The result is that as demand increases, scarcity builds, and those low prices disappear. Eventually, suppliers respond by investing more aggressively in capacity given the pursuit of higher sales amid higher prices, which eventually results in the pendulum swinging back toward lower prices.” But Basu cautions, this time things are a bit different “Because coronavirus vaccine distribution is accelerating, the expectation is that worldwide demand for steel, aluminum, oil and other productive inputs will surge later this year. The result could be substantial upward pressure on construction input prices. Some of these dynamics became apparent during the second half of last year but will likely become even more obvious as the global economy recovers in earnest.” ABC’s Construction Confidence Index supports this proposition; more than 55% of contractors expect their sales to increase over the next six months.