Producer Prices in December – Price Relief, But For Whom

The Bureau of Labor Statistics (BLS) released the Producer Price Indexes (PPI) for December. Inflation in prices received by producers (prior to sales to consumers) declined 0.3% in December from November driven by a 1.2% decline in final demand for goods, partially offset by a 0.2% increase in final demand for services. Excluding food and energy, core prices rose 0.2%.

The most significant development of the last six months has been plunging oil prices. This has translated into falling gasoline and diesel prices which have lowered transportation costs, provided consumers with more disposable income, and is likely adding to overall economic growth (in the range of 0.2 – 0.3 percentage points). These low prices are expected to persist for the near term. Futures contracts for crude oil delivered in December 2015 are currently trading around $60/barrel, up only modestly from current $50 spot prices.

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However, the direct impact of falling oil prices on building materials prices and regional economies will be mixed. For example, Texas and North Dakota will experience slowdowns in previously booming energy sectors. And while transportation costs will be reduced it remains to be seen whether those savings will be passed through to consumers. Prices of asphalt shingles (asphalt is a byproduct of crude oil refining) rose with the price of oil but did not decline with it, so even raw material cost savings may not trickle down. Overall, lower gas prices will be good for broad economic growth, good for consumers, good for housing demand, but will likely have little impact on building materials prices.

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Prices for gypsum declined 3.8% in December, pushing them just below the housing boom peak. Prices are currently 40% higher than 2011 levels. Manufacturers have announced another round of price increases for 2015.

Softwood lumber prices declined 1.2% in December but have moved mostly sideways through 2014. Forecasts for 2015 are relatively flat. Prices have been high enough to avoid the tariffs and quotas associated with the US-Canadian Softwood Lumber Agreement since mid-September 2013.

Prices for OSB rose 0.2% but appear to be flattening out. After spiking in 2013 prices collapsed, falling 40% through the end of the year. Prices declined another 10% through 2014 but ticked up in November and December, reducing the 2014 decline to 7.7%.

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