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Economist Warns of Material Sticker Shock

October 9, 2006
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WASHINGTON - The Associated General Contractors of America (AGC) released its latest Construction Inflation Alert (CIA), warning of an inflation rate for construction materials of 6-8 percent, with periods of 10 percent increases possible.

"Private owners, public agencies that do budgeting and design, and contractors should all be aware that construction materials prices are likely to keep rising at a much faster rate than the 3-4 percent increase in the consumer price index (CPI) or broad producer price index (PPI) for finished goods," said Ken Simonson, AGC's chief economist.

"If these increases continue, I'm concerned that the inflation rate for construction materials could be double the rate of overall inflation."

One example of significant material price increases are those seen in the metal industry. The price of steel soared 50-60 percent in the first half of 2004 after years of flat or falling prices. Steel prices actually declined slightly in late 2004 and most of 2005 but have risen again in 2006. Other metals costs, particularly copper, have jumped even more than steel mill products.

"The extreme cost increases or volatility of some construction inputs are proving troublesome to contractors because they have been sudden, extreme, and unexpected," commented Simonson.

According to Simonson, two factors make construction vulnerable to above average cost increases: Contractors are generally locked into fixed quantities of materials and construction costs are vulnerable to transportation costs and bottlenecks. Unlike consumer electronics makers, for example, contractors cannot generally make a building or a highway smaller or lighter. Contractors also require physical delivery of large quantities of goods to a specific location, in many cases from around the world and any number of influences can drive up delivered costs.

Publication date: 10/09/2006

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