Weaker demand means less construction inflation

The Commerce Department's official inflation measure for construction spending increased by a moderate 2.3% in June compared the same period last year. This followed average annual gains over of 4.1% over the previous two years.

This comprehensive construction cost measure incorporates data on price trends in construction materials and supplies, employer wage and benefit costs, energy and transportation costs, and a variety of other items that are part of the cost of doing business for contractors and other firms engaged in construction work.

The primary driver of inflation in the construction industry during the past several years has been the increased costs faced by contractors for skilled labor, including benefit costs, especially for health and workers' compensation insurance. Energy costs have been fairly stable, when averaged out over a couple of years, despite the seemingly inevitable periodic and unpredictable spikes. And average building materials prices actually declined by 0.9% last year. So far in 2002, construction materials and supplies prices are rising at an annual rate of less than 1%.

This year's deceleration in the comprehensive construction industry inflation rate can be attributed to all of those various factors that are typically associated with weaker demand. Labor markets aren't as tight as they were, with June 2002 construction sector employment almost 3% lower than during the same month a year earlier. Additionally, worldwide manufacturing capacity for almost all kinds of construction materials and supplies is more than ample to fill current demand, so price competition remains intense. Consequently, overall inflation in construction sector costs is expected to be only about 2% during the second half of this year, about half the rate of the past few years.