Jessica Noviskis, CFA
“The lumber experience,” as coined by Federal Reserve Chair Jerome Powell, has become the poster child for transient inflation. After a brief pullback during the early days of COVID, lumber prices moved up sharply in 2020 to an unprecedented peak in May 2021. In the two months since, prices have been cut in half to roughly $790 per thousand board feet. While still nearly double pre-pandemic levels, the move is clearly meaningful.
Lumber embodies the different moving pieces of the inflation debate, impacted by easy monetary policy, fiscal stimulus, pandemic-related supply chain issues, and evolving consumer preferences spurred by COVID. Lumber, like other commodities, is priced based on the balance between supply and demand. The lumber market had initially braced for a COVID-related housing pullback that never came. Instead, increasing housing and renovation demand, fueled by record-low interest rates, extra cash, and newfound time at home, combined with restricted supply amid pandemic-related shutdowns led to a more than 250% increase in prices. Then, supply and demand adjusted. Sawmills ramped production and consumers put off purchases. Homebuilding permits fell to a seven-month low. This change in behavior is counter to conditions typical of runaway inflation and should help ease the worst of those concerns.
While it is unlikely lumber falls back to pre-pandemic levels given the severe housing shortage in the U.S., the correction, along with that in other commodities like copper, soybeans, and corn, does help the Fed navigate the thin line between fostering economic growth and managing inflation. In June, the Fed indicated we could see rate hikes start in 2023, up from previous expectations of 2024, though some analysts think this will be pulled forward again into 2022. The path of rates is important to markets — as we saw with the rate increases in 2018 and the rise in the 10-year earlier this year — and we will continue to look to leading indicators, like lumber prices in this case, to help inform our outlook and client recommendations.
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