Widespread materials inflation demands industry attention.
Contractors, project owners, budgeting and planning officials, and reporters often ask AGC why construction costs in the past two years seem to be rising so much faster than the general rate of inflation, or whether the disparity is real. This paper compares two common inflation measures, the consumer price index for all urban consumers (CPI-U) and the producer price index (PPI) for finished goods, against a variety of PPIs for construction materials and groupings of materials. Data are presented yearly for a nearly five-year period: years ending in December 2001, 2002, and 2003, and the two most recent 12-month periods, ending in September 2004 and September 2005. All figures are percentage changes from the same month one year earlier, as calculated by the Bureau of Labor Statistics ( www.bls.gov/cpi for the CPI-U and www.bls.gov/ppi for all other indexes).
The data available so far do not reflect the impact of Hurricane Rita, and only partial impact from Katrina, on producer prices. Both storms struck especially hard at the supply of construction inputs ranging from diesel fuel to plastics to cement. As of late October, the majority of Gulf of Mexico crude oil and natural gas production was still shut in, virtually assuring that construction materials that use oil or natural gas as a feedstock would be much higher-priced, at least through the winter heating season, than if the storms had not occurred. Katrina also interfered with imports of cement and natural rubber, and the hurricane damaged plants that produce gypsum, lumber and plywood, and liquid hydrogen for galvanizing steel. Chart 1 shows that there was, on average, no change in costs for construction materials and components in the recession year of 2001 and an increase of less than one percent in 2002. Costs rose during 2003 but still remained below the rise in the overall PPI. In general, these increases were not anticipated by either contractors or owners. Owners, in particular, may have been expecting construction cost increases to remain in the three percent range of overall consumer and producer prices.