Key Takeaways:
- Producer price inflation is running at an annual rate of 8.3%;
- Construction industry costs are 20% higher than a year ago;
- Cost inflation of softwood lumber, which had more than doubled in April over the previous year, is now just 5% higher than the year-ago period.
By Manuel Gutierrez, Consulting Economist to NKBA
Producer prices registered their highest uptick in several months in August. Overall monthly prices were up 0.7%, translating into an 8.3% annual rise. As always, though, there are large variations in price inflation among the various products and services. In construction, costs have increased sharply over the last year.
Prices for residential and nonresidential are at least 20% higher since last year (Figure 1), although they have moderated over the past two months. Construction “inputs” include products and services.
Construction prices have risen steadily month-to- month since July 2020. In the August reading, inflation for the residential sector fell, but is still 19.9% higher than a year ago. Similarly, prices in the nonresidential sector have dropped modestly over the last two months, but remain 21.4% ahead of last year.
Residential demand in the form of new housing starts or home sales has been growing over the last year. Total residential construction value in July was 27% higher than the year-earlier period, while in contrast, nonresidential construction is down 3.6% over that same time frame.
Despite the weaker demand in the nonresidential sector, prices for inputs there have been growing faster.
Similar to the differences in price inflation within the construction industry overall, there are large differences among individual product lines within the K&B segment. Figure 2 lists individual products or categories for which the Bureau of Labor Statistics provides price-inflation data at the manufacturers’ level.
Water Heaters (domestic), have shown the highest price inflation by far, at 32.1%, and are nearly one-third higher than they were a year ago. This is a radical departure from the pattern seen over the previous decade prior to the pandemic, when water heater prices had increased at an annual average rate of 3.5%. In fact, in two years of that decade, water heater prices actually fell.
Although inflation for the other products listed in Figure 2 is more modest compared to water heaters, they are higher than their historical standards.
Supply-chain issues are driving the higher prices. Manufacturers are facing higher materials and transportation costs, forcing them to raise prices whenever possible.
Due to sharp increases in supply to meet demand, August lumber prices are just 4.8% higher than a year ago. That’s dramatically lower than April, when they were more than double the previous year.
For some product lines, suppliers may accelerate their production to meet the extra demand.
Such has been the case for the lumber industry (Figure 3). Prices rose inordinately earlier this year, driven by a shortage of product. The price increases for softwood lumber have been the most dramatic, climbing by 113% in April over the previous year.
Over the last three months, however, producers have increased supply, which has resulted in a sharp reversal, with August 2021 prices just 4.8% higher than the year-ago period.
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