Raw materials costs are boosting overall inflation

By Tom Stundza -- Purchasing, 3/19/2008 10:57:00 AM

Despite the U.S. economic slowdown, the threat of rampant inflation among building materials remains, says Ken Simonson, chief economist for The Associated General Contractors of America. He points out that “the huge run-ups in diesel, asphalt, concrete and steel costs have pushed up the government’s Producer Price Index by 50% since December 2003.”

He says in an e-mail to the news media that inflation is very acute in highway construction projects, noting there have been “outsized increases” lately for copper and brass mill shapes (5.8%); hot-rolled steel rebar, plates and structural shapes (3.5%) and diesel fuel (2.2%).

From December 2003 through February 2008, PPI prices for key construction inputs have soared 31% (versus 15% for the consumer price index, or CPI), says Simonson. “That huge gap is especially troublesome for contractors on public projects,” he says, “since public agencies often rely on the CPI to project future costs--but are coming up short of the dollars needed to award contracts.”

Meanwhile, demand is falling for multi-unit residential projects, Simonson says, pointing to Census Bureau data that multi-unit permits plunged 11% in February from January and 23% from February 2007. “Demand for office, hotel and retail construction is reportedly weakening as well," Simonson notes. Still, he is forecasting continued strength for hospital, university, power plant, other energy and communication construction. “There is ongoing demand for these facilities, and their financing is generally more secure than for projects that depend on short-term rents,” Simonson says.