Input Price Inflation May Take a Toll in 2023
Last year, after months of price increases, there was finally relief at the end of the year. Construction and nonresidential input prices recorded their biggest drop in over two years of 2.7% in December. *
That decrease appears to be short-lived as January readings already indicated increases of over one percent.
Contractors rank material costs as one of their top concerns for 2023. The Federal Reserve is also concerned about an elevated producer price index.
For example, inputs to nonresidential construction and commercial construction remain 37.9% and 38.2% higher than February 2020. Commodities such as iron and steel remain 55.9% higher since February 2020, while other widely used materials such as concrete products also remain 27.9% higher compared to the start of the pandemic. *
The effect for nonresidential contractors will be muted because of a large industry backlog which is one month higher than a year ago.
What About the Rest of 2023?
Linesight, a global construction consultant firm recently made predictions about material pricing. They predict that rising interest rates, widespread inflation and supply-chain issues will mean a slowdown for the economy and therefore a slowdown for the construction industry.
Although inflation is moderating, it will remain higher than normal at about 4.7%. Unemployment is low but expected to increase and commodity prices are also expected to increase. The global economy will be negatively affected by a downturn in the Chinese economy due to Covid as well as the war in Ukraine. **
Commodity Inflation Will Ease… Eventually
The following is a selection of commodities that look likely to be of particular interest to the industry.
Lumber: As the housing market has slowed, price pressure has eased and stockpiles have been replenished. After significant supply setbacks in Canada caused by forest fires and flooding in early to mid-2022, producers have rebuilt stock levels. Prices are expected to decline further in the near future given the gloomy outlook for housebuilding demand.
Steel: Steel prices continued to fall in late 2022, reflecting underlying weakness in demand, and the lack of new investment in infrastructure recently. The drop in European demand and the stronger dollar will further add to negative pressure. Public investment programs such as the Investment Infrastructure and Jobs Act, the CHIPS and Science Act, and the Inflation Reduction Act, will help to boost the demand in coming years
Cement concrete: Despite weaker demand in the residential construction sector reflected in a drop in housing starts, cement and concrete prices continued on an upward trend in late 2022. This primarily reflects higher production costs; the producer price index for cement and concrete manufacturing was up by 15% year on year in November 2022. However, demand-side price pressure is expected to ease. The Portland Cement Association (PCA) estimates that demand will decline by 3.5% in 2023.
Drywall: High production costs contributed to a steady rise in drywall prices in late 2022, along with restocking efforts by building material suppliers. However, with the residential building sector continuing to decline, demand-side price pressures will ease in 2023. **
The post-pandemic challenges to the construction industry continue. It seems likely that the rest of 2023 will be full of challenges, especially in terms of costs and labor. The good news is that most economists and industry watchers see things getting better the further we look forward. A natural pendulum swing away from the highest inflation rates will be give the industry some relief. Government action to help relieve the lack of qualified workers will likely improve the labor outlook as well.