PPI Comes Down Some, But Construction Cost Growth Is Still High

There was a bit — emphasis on the small — of good inflation news today. The Producer Price Index report from the Bureau of Labor Statistics showed that the seasonally adjusted PPI for final demand was up 0.3% in November. On a non-seasonally adjusted basis, the index for was up 7.4% for the last 12 months ending in November. That’s down from the previous 8.1%.

Core PPI — without food, energy, or trade services — was up 4.9% for the 12 months ending in November.

Any reduction is welcome news, but that doesn’t mean it’s good enough for the Fed. Plus, CRE construction costs are still facing high inflation.

The adjusted PPI of 0.3% was above consensus expectations. Prognosticators are leaning toward the Fed going with a 50-basis point increase in rates when it meets later this month, but that is still a high figure. It will take much more significant reductions in demand for a chance that interest rates would even hold steady, let alone drop.

“While headline PPI advanced faster than expected in November, monthly increases are down sharply from a year ago, allowing annual inflation to cool for the fifth consecutive month,” Oxford Economics wrote in a note. “The reading is unlikely to figure significantly into the Fed’s decision next week, when we expect a 50bps rate hike — regardless of the outcome of the CPI report earlier that morning. PPI inflation continues to trend downwards, but economic momentum will keep it elevated until at least Q2 of next year.”

For CRE, the news about construction was improved, but again not terrific.  In October, final demand construction was up 19.6% year over year. For private capital investment, the number was 20.7%

For November, overall final demand year-over-year construction increases were 19% and for private capital investment, 20.4%.

In October, materials and components for construction rose 12.2% year over year, with materials up 11.3% and components, 12.8%. November saw, respectively, 10.0%, 9.5%, and 10.4%. Significantly lower, but still high increases pile onto what came before.

To get a sense of the accumulated impact, look at the November final demand year-over-year construction increases in 2020, 2021, and 2022. The unadjusted percentage change from 2019 to 2020 was 1.2%. From then to November 2021, there was a 12.3% jump. Next, 19% to 2022. Apply each of the increases and you get a 35.2% jump in those delivered buildings between November 2019 and 2022. A unit that might have cost $875,000 in 2019 now runs $1,183,000. Which is a lot to pass on or pencil in a deal.