WASHINGTON - "Get used to higher materials cost inflation," Ken Simonson, chief economist for the Associated General Contractors of America (AGC), warned. Simonson commented after the Bureau of Labor Statistics issued its report on the producer price index (PPI) for May.

"Overall, producer prices are remaining well behaved, with only a 0.2 percent increase in May and a 1.5 percent increase in the last year, outside of food and energy," Simonson noted. "But the PPI for construction materials and components jumped 1.2 percent last month and 7.8 percent over 12 months. By project type, the 12-month increases range from 8 percent for new single-unit residential construction to 16 percent for highway construction.

"Many materials are contributing to the increase," Simonson commented. "In the last 12 months, there have been increases of 87 percent for copper and brass mill shapes, 48 percent for asphalt, 40 percent for diesel fuel, 26 percent for gypsum products, 18 percent for plastic construction products, and 15 percent 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."

Publication date: 06/19/2006