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Recent Strength in Raw Materials Pricing Driving Higher Equipment Prices

Construction costs rose again in October, according to IHS Markit (Nasdaq: INFO) and the Procurement Executives Group (PEG). The current headline IHS Markit PEG Engineering and Construction Cost Index registered 61.8, up from 58.4 in September. 

The materials/equipment price index was 64.3 in October, moving up from the September figure of 59.3. Price increases were widespread; with the exception of ocean freight from Asia to the United States, every category in the materials index showed higher prices. All downstream materials, ranging from transformers to electrical equipment, showed a higher index figure relative to last month. This is indicative of price increases in raw materials filtering to downstream materials.  

"Electrical equipment prices will experience modest escalation over the next two years, driven by double-digit increases in the price of copper,” said John Bauman, principal economist - pricing and purchasing, IHS Markit. “However, prices for two other important input categories – fabricated metals and plastics – are expected to weaken and provide some relief.”

Current subcontractor labor prices rose at a slower pace in October compared to September: the index was 56.1 in October, slightly lower than last month’s figure of 56.4. Regionally, costs rose in all four regions of the United States. In Canada, the results were mixed; labor costs fell once again in eastern Canada but they were flat in western Canada. 

The six-month headline expectations index recorded another month of increasing prices despite a slight give back from 67.0 in September to 65.9 this month. The materials/equipment index stayed positive, at 67.4. Similar to current material/equipment prices, expectations for future price increases were widespread, with index figures for every component coming in strongly above neutral. Price expectations for sub-contractor labor came in at 62.2 in October. Labor costs are expected to rise in all regions of the United States and western Canada; they are expected to be flat in eastern Canada.

In the survey comments, participants note a cautiously optimistic environment for 2018.