A year-over-year increase of 11.2% in producer prices is markedly higher than the 1.1% increase for non-residential construction.

By Manuel Gutierrez, Consulting Economist to NKBA
 

The Producer Price Index (PPI), one of the price data barometers gathered by the Bureau of Labor Statistics (BLS), showed that residential construction prices have spiked by 11.2% compared to year-ago levels. They had been relatively low and stable, hovering just below a 1% increase until April 2020, the first full month of the pandemic business shutdown. But in May 2020, they began a steady climb to today’s double-digit increase.

The BLS collects two types of price data. One is the retail prices that consumers pay when they purchase goods, known as the Consumer Price Index (CPI). This index reflects the changes in the price of goods and services.

The PPI focuses on prices received by “producers” of goods and services. They are the prices that businesses — mainly wholesalers, but also retailers like home-improvement businesses — pay for the products they purchase from manufacturers and other suppliers. The BLS collects price data for more than 10,000 items on a monthly basis and computes an index value for each product or service collected. Although it spans a gamut of industries, the focus of this report is on overall pricing trends for the Construction industry.

The Construction industry comprises two main sectors: Residential and Non-Residential. Interestingly, prices paid by businesses in those two sectors have moved in different directions (Figure 1.)

The increase in prices for residential construction is a result of higher demand for new housing. Over the last 10 months, the value of residential construction has risen by 26%, from an annual rate of $562 billion to just under $713 billion (annualized) in January.

Over the last 10 months, the value of residential construction has risen by 26%, from an annual rate of $562 billion to just under $713 billion (annualized) in January.

At the same time, prices paid for products used in non-residential construction have been falling. This, too, is based on demand and is the result of a declining non-residential construction market, which is down by 6% over the last 10 months to $447 billion.

While prices of products used in non-residential projects were rising at an annual pace above 5% through most of 2019, the pace slowed toward the end of that year. And, as can be seen in the bottom panel of Figure 1, the annual rate of price increases has been falling. February prices were just 1.1% above the same month last year, which is a significant difference from the residential sector, where, as noted, prices are 11.2% higher.

Both components of new residential construction — single-family and multifamily housing — have seen substantial increases in the price of materials. Figure 2 displays the annual price increases for both categories over the last 24 months.

Single-family and multifamily follow similar patterns. This is because both types of housing use similar products, although the quality and amount may differ.

One of the critical components in housing construction, especially for single-family homes, is lumber. Because lumber prices have been rising sharply, their cost as a share of total home construction costs has increased, although they represent only about 10% to 12% of construction costs for an average new home.

Figure 3 displays annual price increases for Lumber used in construction over the last two years. Again, the steady increase in prices since April 2020 is quite apparent.

Prior to that month, lumber prices were actually falling, but the strong post-pandemic demand for new housing, combined with supply issues, drove lumber prices to the current substantial rate increase of 58.9% as of February.

Many other housing products have experienced more reasonable price inflation. Figure 4 identifies several of these items, with Water Heaters displaying the highest rate increase, 6.8%, over last year.

Other products highlighted in the chart with comparatively high inflation are Brick & Tile, with 3.3% higher prices, and Household Appliances, up by 2.6% since February 2020.

Note that two products, Windows and Window Shades, are essentially flat compared to a year ago.

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