Material price relief is within sight

Widespread commodity price declines in the last month will provide some relief in construction materials inflation which spiked up to 1.2% in May from April for both construction commodities and finished construction products.

Copper prices dropped 30% as the speculative bubble burst. However, pipe, tube and wire prices will remain well above the 2005 level through next year.

Lumber prices dropped 10%.Credit this to the abrupt cutback in housing starts prompted by a two month surplus of new homes for sale.Further significant lumber price declines are not expected during the summer.

Energy prices also fell.Natural gas futures prices averaged several percent lower over the last month which will reduce petrochemical feedstock and plastic prices soon.Crude oil prices declined $2/bbl., dropping gasoline prices $0.05/gal. with an larger decline in gasoline futures prices. It is unlikely that a persistent declining trend has begun but the underlying demand/supply balance in energy markets continues to suggest weaker prices ahead absent any new supply interruptions.

Four of the five products with outsized price increases in May are familiar.Nonferrous pipe and tube increased 17.5% from April to May. Diesel fuel increased 4.0%. Gypsum products increased 3.7%. Most concrete products increased 0.5-1.0%.And lumber prices surged temporarily, increasing 3.7% to the highest level since last June.

Overall PPI inflation was only 0.3% in May.The “core” inflation rate, excluding energy and food, increased 0.2% in May to 1.6% higher than a year ago.This means inflation is contained just below the Federal Reserve Banks’ tolerance limit which keeps the risk minimal of further interest rate increases by the central bank although another 0.25% rise in interest rates is now as likely as not at the end ofJune.