AGC Chief Economist Advises Construction Industry to “Get Used To” Higher Material Costs
"Get used to higher materials cost inflation," Ken Simonson, chief economist for The Associated General Contractors of America (AGC), warned earlier this week, following the Bureau of Labor Statistics’ release of its report on the producer price index (PPI) for May.
"Overall, producer prices are remaining well behaved, with only a 0.2% increase in May and a 1.5% increase in the last year, outside of food and energy," Simonson noted. "But the PPI for construction materials and components jumped 1.2% last month and 7.8% over 12 months. By project type, the 12-month increases range from 8% for new single-unit residential construction to 16% for highway construction.
"Many materials are contributing to the increase," Simonson commented. "In the last 12 months, there have been increases of 87% for copper and brass mill shapes, 48% for asphalt, 40% for diesel fuel, 26% for gypsum products, 18% for plastic construction products and 15% for cement.
"I expect a few of these increases to level off as the housing market cools, but most are tied to strong U.S. and world demand for materials and freight transportation," Simonson said. "Thus, I think construction materials costs will keep outstripping the overall inflation rate.
"Public agencies, private owners and contractors need to face this new reality," Simonson concluded. "Budgets must allow for more inflation, for purchasing materials earlier and for sharing the risk and reward from price volatility."