Construction Industry Poised for Savings as Producer Prices Slow
Dodge Construction Network is closely monitoring the latest Producer Price Index (PPI) report released by the Bureau of Labor Statistics. The report indicates that the change in prices for final goods and services decreased slightly over the month. In the 12 months through March, the PPI increased 2.7%, a slower pace than February’s reading of 4.9%. This represents the lowest rate of growth since January 2021. This drop was largely driven by falling goods prices, particularly lower energy prices, fresh and dry vegetables, and services.
What is it?
The PPI measures the average change over time in the prices that manufacturers and producers receive for the goods they sell. It tracks the price of goods at various stages of production, from raw materials to finished products, and is an important indicator of inflationary pressures in the economy. Essentially, it helps us understand how much producers are charging for their goods and how that changes over time. Being in the construction industry, we recognize the importance of keeping a close eye on key inflation indicators like the PPI. In this release, it shows a decline of 0.5% in March for final demand, which means that the prices producers received for their goods and services decreased. This can have a few impacts on the broader economy.
How does it affect you?
A decrease in the PPI for final demand, is good news for the construction industry as a sector that relies heavily on raw materials and supplies, any decrease in producer prices can have a significant impact on the bottom line for construction firms.
First, it will help lower inflationary pressures. The Federal Reserve has been trying to lower inflation, and a decrease in PPI is a sign that we are on the right path. If producers are receiving less money for their goods, it can lead to lower prices for consumers, which can help keep inflation in check. Although most prices continue to increase, they are doing so at a slower rate. Most have remained persistently high with the exception of the lumber trade, which is leading the way in deflation. Softwood lumber (-49.3%), plywood (-28.7%), and hardwood lumber (-14.3%) all posted year-over-year decreases.
“For builders and developers, the recent fall in the PPI for final demand is welcome news because it signals that inflationary pressures may be receding, ” said Ralph Flores, an economist at Dodge Construction Network. “This suggests that the supply chain is stabilizing since the pandemic and may potentially lead to cost savings for construction projects currently in the pipeline. This could make it easier for construction firms to bid for projects and could lead to lower construction costs for developers. We are optimistic that this trend will hold, and we’ll see further declines in the PPI for final demand in the coming months.
While month-to-month comparisons can be volatile, the drop in PPI prices from February to March is significant. We’ll continue to monitor key indicators like the PPI closely to help us make strategic decisions for our business and clients.