I believe the contracting community is about to be put into a squeeze of large proportions! Commodity prices were drastically rising until the September/October 2008 time period. Since then they have plummeted, recouped some loses and fallen again. At one point in time copper was cheaper in 2009 that in was in all of 2008. Now it is back to third quarter 2008 levels – high but not like the peak in 2008.
The cost collision is going to come in the next few months from that ugly wrecker of the economy called inflation. This inflation is the result of United States of America’s federal government “printing presses” adding money to the system. This oversupply devalues the purchasing power of the dollar and creates price increases. This is the classic, traditional definition of inflation.
The rising prices over the 2004 to late 2008 time frame were not inflation related increases, they were demand induced increases. Demand was such that prices kept increasing. The demand was due to many factors. Some was supply related where the supplies of raw materials could not keep pace with the rate consumption. Some of the demand was due to shortages of skilled craft and staff labor. Perhaps some of it was artificially stimulated with too easy to obtain credit – I’ll let the economists argue that one some more.
When the inflation squeeze comes, it will likely make the price increases due to demand look pale in comparison. Our economy has not had a serious inflation problem, like the one looming now, since the 1970’s. Contractors faced material shortages, long lead times on basic construction materials, rising prices and high interest rates in that era. They faced wage and price freezes in attempts to “cure” the rising prices from inflation.
Contractors are currently suffering from low demand. Owners are suffering from very tight funds and/or overbuilding in many cases. Material suppliers have already started notifying contractors of impending price increases. I know of one area where the suppliers have announced four ten percent increases over the next few months. Whether they hold or not is debatable at this time. Unlike the 1970’s where contractors faced the inflation coming from a good economy, the industry is currently suffering from low backlogs and virtually non-existent profits for reserves. If this continues the upcoming inflation cost collision is going to wreak havoc for contractors and owners alike. The feds need to reduce their inflationary money practices so all will benefit in the long term.
