Inflation, or Just A Bump in the Road?
Home building professionals have seen a historic increase in material costs this year. Lumber has been the biggest culprit going from a pre-pandemic level of about $400 per thousand board feet to a record $1,700 per thousand board feet in May.
Are these wild price increases a result of inflation bursting through the entire economy?
The infusion of trillions of dollars into the American economy through pandemic relief including stimulus checks, boosted unemployment benefits, and a very accommodating Federal Reserve policy has left the economy awash in cash.
While the pandemic put the brakes on virtually all businesses, it actually created conditions ripe for high demand for home builders and therefore a great need for supplies, especially lumber. Super low interest rates and low available home inventory created a hot market. Since construction was considered an “essential” business, many builders had a very good year, even by normal standards. The industry is the biggest user of lumber products of course, but on top of industry demand, consumers found themselves with a lot of time at home and stimulus money to inspire them to do long put-off DIY projects. Demand from consumers took home improvement stores by surprise and shortages eventually followed.
Besides unexpected demand, lumber mills had idled or slowed production. But even before Covid hit the US, lumber inventories were low.
“Inventories were down 33%,” Mace McCain, president of Frost Investment Advisors said. “And then the surge of the housing production, which increased demand by 14%. So we got two big imbalance happened very quickly.” *
Another challenge is that even though housing and consumer demand has slowed very recently, it is still super hot. New home construction was up 50% in May compared to a year ago and up 21% from May 2019.
Remarkably in only a few weeks since the May high in price, lumber prices have tanked. Now at about $900 per thousand board feet, it’s still quite high but dramatically cheaper. As lumber mills ramp up to meet demand and take advantage of high prices, more product will become available.
Looking at the bigger picture, commodities in general typically spike when inflation is accelerating, though concerns eased as commodity futures from copper to nickel cooled. Commodity prices are often taken as a barometer of wider forces in the economy.
Federal Reserve chair Jerome Powell on Wednesday pointed to lumber’s falling prices to back up the central bank’s claim that inflation will be temporary. *
In spite of the Fed’s diligence at monitoring inflation, the economy is really in uncharted territory. We’ve never experienced such an unexpected crash of all sectors of the economy, followed by record government stimulus, which seems to generally be working better than we could have imagined.
Low inventories and production delays due to Covid are still significantly affecting many sectors including electronics and automobiles. The chip shortage is likely to be a problem for at least the next year if not more. Automakers and manufactures of a wide range of products have been using ever more processing chips in their products, meanwhile manufacturing capacity has not increased. The fact that most of the chips are made in only a couple of places in the world has created a crunch that will take significant investment and time to remedy. Shipping, including for chips, has experienced serious backups as well as capacity shortage. The good news is that all of this has already prodded manufacturers to make plans to increase chip manufacturing capacity in the US.
Though there is a possibility that inflation will become a real problem throughout the economy, it is more likely that we’ll see temporary ups and downs as we have seen in lumber. There is good reason to believe that most of the imbalances in the supply chain can be worked out in the foreseeable future and that we’ll be better off with a more robust manufacturing infrastructure after the dust has settled.
* https://markets.businessinsider.com/
