Natural Gas, Crude Petroleum Price Increases Impact Nonresidential, Overall Construction Prices

Nonresidential and overall construction input prices ticked up in September, buoyed by rebounding natural gas and crude petroleum price increases. According to an analysis of U.S. Bureau of Labor Statistics’ (BLS) Producer Price Index data by Associated Builders and Contractors (ABC), nonresidential input prices increased 0.3% in September from August, while overall construction prices increased 0.3% on the month, after declining by 0.2% in August.

The monthly uptick in nonresidential input prices marked the first such rise since November 2014, noted ABC chief economist Anirban Basu.

“For roughly two years, declining energy prices had wrung much of the inflation out of the economy, allowing interest rates to remain low and the Federal Reserve to remain fixated on guiding the nation toward full employment,” Basu said. “Energy prices are no longer falling. Moreover, wage and healthcare inflation are building, which could drive interest rates higher next year. That scenario is not good for real estate valuations and nonresidential construction.”

Increased prices come on the back of many additional price pressures contractors say they are facing, he noted, including buyers demanding lower construction charges, higher labor costs and other rising expenses.

“The challenge for many contractors is to pass materials cost increases along to users of construction services in an effort to sustain margins,” Basu said. “Evidence suggests that this was not a major issue for construction firms prior to the Great Recession, but purchasers of construction services are now much less likely to accept significant cost inflation. The good news is that with the U.S. dollar strengthening recently, sharp month-over-month increases in many construction materials prices are unlikely in the near term.”

- Nicholas Stern, editorial associate

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