Never Mind the CPI, the Construction Producer Price Index Is Really Soaring

At an annualized rate of 8.5%—the highest rate in 40 years—the consumer price index, more colloquially known as inflation, hit peoples’ pockets hard in March.

If only they knew how good they had it.

The Producer Price Index (PPI) for Inputs to Construction—how much prices paid by the construction industry for goods and services change year over year—ran roughly 2.5 times that of the inflation consumers see.

Inputs to multifamily residential construction, excluding capital investment, labor, and imports, were up 20.1%. For single family homes, the increase was 20.4%. And non-residential construction? Up 21.5%. At 21.7%, commercial and healthcare was even higher.

“While the price growth in March represents a deceleration from the June 2021 peak, builders continue to face inflationary and supply chain headwinds. Inflation of building materials costs remains high, forcing builders to pass on rising costs in the form of higher prices,” said First American senior commercial real estate economist Xander Snyder in prepared remarks. “At the same time, builders are trying to accelerate construction to meet unrelenting demand for certain commercial real estate asset classes, but supply chain disruptions have hindered the pace of construction, contributing to an ongoing supply-demand imbalance.”

The National Multifamily Housing Council said that 92% of the firms it surveyed “reported that deals have been repriced up over the past three months. On average, the pricing increases were 25%. Lumber was one of the big increases at a 45% jump. Electrical components, up 15%; exterior finishes and roofing, 14%; 12% for insulation; and 5% for appliances.  Exterior finishes and roofing, up 63%.

“Additionally, the March PPI is the first that accounts for a full month of energy market dislocation caused by the Russia/Ukraine conflict,” Snyder said. “Diesel provides the vast majority of energy used in construction, and the average retail price of diesel increased 25% from late February to early April, according to the U.S. Energy Information Administration. Port congestion, which has extended lead times for builders to acquire construction materials and contributed to price increases, is improving but remains a source of delays. Many builders have responded by storing construction material in nearby warehouses before beginning a project, and prices for warehousing services continued to rise in March, driven by a national shortage of warehousing space.”

But wait, there’s one more thing. Interest rates. Federal Reserve Governor Christopher Waller told CNBC that half-point interest rate hikes were the likely course ahead.

Source: Globe St.

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