Lumber prices are on the rise again after a brief reprieve this summer, adding to concerns of lingering inflation

• Lumber prices have jumped 50% since mid-August, reviving an inflationary pressure that helped send home prices higher.
• While lumber prices are still 60% below their record high, they are well above pre-pandemic levels.
• The surge in lumber, energy, and even used car prices could lead to higher inflation and put pressure on the Fed for a policy change.
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Lumber prices are back on the rise.

The integral homebuilding material has surged about 50% from its mid-August bottom of $448 per thousand board feet. That’s after falling about 60% from a record high of $1,733 in early May, as supply chain disruptions and an insatiable demand for homes drove an incredible boom and bust cycle for the commodity.

Lumber prices are still 70% higher than their pre-pandemic levels of around $400 per thousand board feet. That price difference is being felt by everyday Americans. A report from the National Association of Home Builders earlier this year found that lumber’s price surge added an average $36,000 to the cost of building a new home.

And home builders like KB Home have indicated to analysts that despite lumber’s spectacular rise and fall, it’s likely not going to lower the price of its homes and pass along cost savings to the consumer after the company raised its prices to account for sky-high lumber prices, according to KB Home’s second quarter earnings call.

“And what’s your sense if the lumber costs start to go down and supply chain issues start to resolve themselves? Is it your sense that pricing is going to stay up here and margins are going to expand or is it your sense that somehow the prices are going to start to work your way back down as — in other words, will builders pass along some of the cost savings when they will start to happen?” Alex Barron of Housing Research Center asked KB Home CEO Jeff Mezger.

“Our hope and expectation is, we’ll take it to margin,” Mezger responded, indicating that the company has no plans to pass along the cost savings derived from the steep 60% decline in lumber prices over the past five months.

Lumber is a key building block of the US economy, and its rising prices have helped push up inflation to 30-year highs. So has a surge in energy prices, like oil and natural gas, and a resurgence in used car prices, which have hit new records as automakers deal with an ongoing shortage in semiconductor supply.

While Fed Chairman Jerome Powell has stood by his view that inflationary pressures will be transitory as supply chain bottle necks eventually resolve, he may be forced to make a policy change if inflationary pressures last well into 2023 and beyond.

Raising interest rates and ending the monthly taper program are two key levers Powell can use to combat inflation, but those changes could put pressure on stock prices, which have been conditioned to be on the receiving end of some form of monetary easing since the 2008 financial crisis.

Yet, in a period of rising inflation, Wharton Professor Jeremy Siegel believes that stocks are one of the best assets to own as a hedge to rising prices. The thinking goes that businesses with real assets can pass along price increase to its customers, thus boosting profits, as KB Homes is doing now.