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.