The Bank of Canada Used Lumber To “Prove” Transitory Inflation, Then Prices Doubled

Canada’s central bank used lumber prices to dismiss inflation, but it’s doing the opposite. In October, the Bank of Canada (BoC) used lumber to back its transitory inflation narrative. Short-term supply chain issues are the problem, not monetary policy, they explained. Excess demand fueled by easy money has since been acknowledged as the culprit by the US central bank. Still, Canada has yet to recognize elevated inflation is not transitory. As they sit quiet, the price of lumber has been soaring, driving home costs even higher.

Lumber Prices Have Jumped Almost 30% In The Past Month

Lumber prices have been ripping higher over the past couple of months. On Thursday, lumber futures reached US$1,209 per mbf, up 3.0% from the day before. Prices are now 29.2% higher than last month and 34.1% higher than last year. A little higher than the 2% inflation goal most central banks in Canada and the US claim as the target. Higher lumber costs contribute significantly to higher home prices, especially new construction.

SPF Lumber Price

The closing price for SPF random length lumber.

Source: Trading View; Better Dwelling.

Lumber Price Inflation Will Drive Housing Costs Higher

Higher lumber prices have added a considerable cost to building a new home. Compared to pre-pandemic, an extra US$35,850 is added to the cost of building an average single-family home in the US. Existing homes are also impacted by this increase, since they’re considered a substitution. Additionally, high lumber costs drive insurance replacement costs higher. Higher costs for insurers often means higher costs for their clients. Inflation is adding up, even if it’s not fully reflected in Canada’s consumer price index.

Lumber Prices Have Almost Doubled Since The BoC Said It Proves Inflation Is Transitory

Lumber prices have shown tremendous growth but are down from the peak reached last year. After hitting a record in May 2021, lumber prices crashed 73% at the low for the year. BoC Governor Macklem used this as an example of transitory inflation in October.

At the time, he explained the shock of the pandemic and supply bottlenecks caused the issue. He dismissed the idea it could be overly easy monetary policy, since prices were falling. He’s ignoring lumber at a 73% discount is still 5x the target inflation rate, but that’s a different point. 

Since then, not a lot has changed with monetary policy, but a lot has changed with lumber prices. Prices have nearly doubled (+90%) since the speech just three months ago. The US central bank has since killed the transitory narrative, promising to tighten policy. Canada has been quiet since the Federal Reserve basically destroyed its narrative

Part of this surge has been the BC floods, but not all of it. The increase in lumber costs began well in advance of the floods. For the most part, rising lumber costs are due to one of its biggest consumers — housing.

BMO has flat out said easy monetary policy has led to “excess” demand for home purchases. Investors, fueled with negative mortgage rates, can’t buy enough housing, according to the BoC’s research. The elevated demand has created record building, which places a strain on supplies. Hence, higher lumber prices.

Forcing a lot of home building in a very small period of time produces higher home prices, ironically.



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  • D 2 years ago

    >In 2012, the Provincial Solvency and Federal Obligations study found that Ontario had a 42.9% probability of defaulting on its debt obligations in the following 10-20 years (higher than any other province) and a 79.3% probability of defaulting in the following 30 years.[35]

    With all the debt accumulation in the past 2 years I wager the provincial government will default within the next 10 years at a 100% probability. Ontario and Toronto are a liability now, inflation needs to be curtailed but that won’t fix the trainwreck that’s about to happen with the indebtedness of our province and city. Austerity is coming.

    • Alex 2 years ago

      I love me some austerity.

    • Robert Christian 2 years ago

      I do appreciate your conviction here, but you do realize how seldom this has happened in the industrial world? There are a great deal of things that could happen in advance of that, such as significantly higher bond prices and fuel/tax increases, yes?

      I’m with you that’s somethings gotta give here with the debt, but…..!

    • Lillian Russell 2 years ago

      We got Harper out of Ottawa. Now if we get Ford and his hoods out of Queens Park Ontario should be OK.

      • Lou Chao 2 years ago

        haha. That’s funny. Ford doesn’t control the monetary supply though. Literally the reason mortgage credit is expanding so quickly is to finance federal deficit spending.

        The BOC even tried to stop buying bonds, but had to buy an extra $5 billion to add to the balance sheet, because the Fed is in control. Few people understand this, and they damn well know it.

  • Jared 2 years ago

    House price inflation is transitory too. It won’t continue to appreciate by 50% per year. Some years it will be 10%, some will be 50%. So it is transitory. Canadians should just buy houses and participate.

  • Jim Straughan 2 years ago

    Well,starting in the summer of 1998:

    Venezuela, July 1998 – defaulted on $270 million worth of domestic currency bonds

    Russia, August 1998 – a massive $72,709,000,000 default that rattled the entire global economy. The trouble started in August of ’98 when the country missed payments on local Treasury obligations, and later extended to include foreign currency obligations and MINFIN III foreign currency bonds. Russia’s debts were eventually restructured in later years.

    Ukraine, September 1998 – $1.27 billion dollar default

    Pakistan, July 1999 – defaulted in July of 1999 but quickly resolved the situation

    Ecuador, August 1999 – missed a payment, leading an an eventual restructuring of over 90% of their bonds. Default amount was around $6.6 billion

    Ukraine, January 2000 – defaulted again (1.06 billion) in January of 2000. Defaulted on both DM-denominated Eurobonds and USD-denominated bonds. Ended up rectifying the situation by exchanging their current obligations for bonds with a longer term and lower coupon.

    Peru, September 2000 – defaulted on $4.87 billion of debt but rectified the situation within 30 days

    Argentina, November 2001 – a massive $82.26 billion dollar default that once again rattled the global economy and worldwide markets. Missed a payment in early 2002 – debt obligations were restructured and the country continued to receive funds from the IMF to aid in their recovery

    Moldova, June 2002 – defaulted on $145 million worth of debt, only to rectify the situation a short while later, once to default once again

    Uruguay, May 2003 – Argentina’s troubles spread to Uruguay, and the government of Uruguay defaulted on $5.7 billion dollars worth of debt in May of 2003. The country eventually completed a restructuring of their debt obligations with their bondholders

    Dominican Republic, April 2005 – Defaulted on $1.62 billion dollars worth of debt in April of 2005. Eventually completed a debt restructuring that ended up extending the maturity of their debt obligations by five years

    Belize, December 2006 – Defaulted on $242 million dollars worth of debt in December of 2006

    Ecuador, December 2008 – Defaulted on $3.2 billion dollars worth of debt obligations after calling several of their previous debt offerings “illegal and illegitimate”. An unusual situation in that Ecuador is thought to have the resources NOT to default, but chose instead to default for “moral” reasons.

    *note* there were other sovereign debt defaults that occurred during this period, including Ivory Coast, Grenada and Seychelles, but these countries did not have Moody’s ratings on their sovereign bond obligations at the time
    Source: Moody’s – Sovereign Default and Recovery Rates, 1983-2008

  • Zenix 2 years ago

    There’s a much simpler plan.

    Scrap CMHC!

    It guarantees hundreds of billions of sub-prime mortgages that banks profit from creating.
    It does so without any free market pricing of the risk premium that should be charged for that junk.

    CMHC (100% taxpayer backed), Genworth (90% taxpayer), Canada Guarantee (90% taxpayer).
    Why is this enormous moral hazard being deliberately fostered upon the backs of taxpayers?

    Either taxpayers are forced to pay when the above mortgages default or housing prices have to be kept aloft / over-priced to prevent a tsunami of mortgage defaults.

    Long live Crony Capitalism !!

  • harry 2 years ago

    What about copper prices nobody seems to talk about it. The price has gone up from 120 to 280 for 150m roll of wire. Everything has gone up for electrical material in prices but nobody seems to talk about it.

    • Rob Turner 2 years ago

      Steel is also something like 3x 2020 prices. If the government is subsidizing the cost of building, why not stick them with the higher bill?

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