The surge in construction materials prices continued in May with the price index up 0.7% from April. Plywood prices jumped 6.1% to 27.9% higher than three months ago. Softwood lumber prices rose 3.8% to 11.1% above February. Monthly price gains were 3.1% for Gypsum products and 1.0 to 2.6% for various steel products. The gain in the construction materials price index was held down by declines in copper and diesel prices. The overall Producer Price Index fell 0.3% in May as inflation remained tame in the rest of the economy.

Much of the price surge in the last few months was due to an abrupt demand spike for residential materials as homebuilders scrambled to finish homes before the homebuyer tax credit deadline. The 10% May decline in housing starts assures a weakening of this demand driven price pressure for several months which will permit lumber and steel mills to bring production capacity up to current demand and cut the price premiums charged in the last few months. Already, spot lumber prices are 26% below the peak April level and futures prices are nearly 25% below spot prices. Steel scrap prices were off 5.7% in May suggesting that steel product prices are now declining from their spring peak level.

The overall construction materials price index increased 3.1% in the last three months but the late spring/early summer cutback in residential construction will drop the inflation pace noticeably lower in June-August period. However, the summer price reprieve for construction materials will be brief. The rapidly expanding world economy is raising all commodity prices and the depreciating $US dollar is further adding to US commodity prices. The price index for construction materials will rise about 6% this year while overall inflation remains near 1%.

While the $US dollar has appreciated in the last few months as capital came here from Europe during the public deficit crisis in southern Europe, the outlook is for the recent appreciation to be largely reversed later this year. Already, European public bond sales have signaled that investors are regaining confidence in the financial situation in Portugal, Spain and Italy. As a result, some short term capital will return to Europe from the US, depreciating the $US and boosting commodity prices. This may be happening already for crude oil.

The recent price surge for construction materials has not increased overall construction costs. The Bureau of Labor Statistics indexes for total construction costs, including labor and contractors’ margin have been stable. This means that margins are still shrinking as would be expected in a weak market.