The construction industry should brace for rising material costs despite seemingly calm Producer Price Index (PPI) reports, according to a leading economist who warns that current metrics may be masking significant upcoming price pressures.
Ken Simonson, Chief Economist at Associated General Contractors of America, argues that the complex nature of global supply chains and recent tariff changes could lead to unexpected cost increases that aren’t yet visible in standard industry metrics.
Understanding the PPI’s Limitations
“The PPI is based on selling prices of domestic vendors, whether they’re the producer, the distributor, the importer,” Simonson explains, highlighting how this structure can delay or obscure real price pressures in the market.
According to Simonson, several factors complicate the pricing picture. Variable tariff rates across different countries create uneven cost pressures, while the multi-stage supply chain delays when those costs actually show up in bids and invoices. In addition, many contractors are still working through inventory purchased before the new tariffs took effect, masking the full impact on current material prices.
The Tariff Effect
The impact of recent tariff changes is particularly complex, Simonson notes. “Foreign producers now face very different tariff rates, whether they’re based in Brazil, say, or in Mexico or China,” he explains, adding that these variations create a complicated pricing environment for importers and domestic suppliers alike.
Some tariffs have reached as high as 50% on certain materials from specific countries, particularly affecting crucial construction inputs like copper, steel, and aluminum.
Rising Price Pressures
Despite relatively calm recent PPI reports, Simonson sees clear signs of increasing cost pressures. “I think we are headed to higher prices… steel producers in particular have been quite prompt to raise their prices,” he warns.
The latest data reinforces Simonson’s concerns. Construction input costs rose 2.3% year-over-year in June, marking the largest two-year jump in material prices on record. At the same time, labor costs continue to climb at a pace well above broader economic averages, adding further pressure to project budgets.
Strategic Implications
For developers and contractors, Simonson suggests these trends require careful consideration in project planning. “People shouldn’t assume that a mild PPI report in the next month or two means that there’s nothing to worry about,” he cautions.
The combination of rising material costs and continued labor cost increases presents particular challenges for project budgeting. Simonson notes that construction labor costs “have continued to climb at a higher rate than in the broader economy.”
Looking Ahead
Simonson advises developers to brace for a delayed impact from recent tariff changes, which may take months to filter through the supply chain. He also anticipates continued upward pressure on domestic material prices and warns of potential supply chain disruptions as markets adjust to evolving trade policies.
The message is clear: while current price indicators may appear relatively stable, significant cost pressures are building in the construction supply chain that could impact project costs in the coming months.
