Why lumber costs fluctuated drastically during the pandemic, and how it affects inflation

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• Amna Nawaz:

  Home prices and rents have gone up this year, and that is in part because of the increase in the cost of lumber. Could the wild swings in the price of wood over the past two years be a sign of inflation continuing to go up?

  Economics correspondent Paul Solman takes us for a ride.

• Paul Solman:

  A roller coaster we featured in a story back in 1989. Why use it in a story about lumber prices decades later? Well, hang tight for a few minutes.

  But, first, what has been happening to lumber?

• Stephen Beckerle, Co-Owner, Beckerle Lumber:

  Volatility, it's the main word, volatility.

• Paul Solman:

  Stephen Beckerle's family owns a small chain of lumber yards in Rockland County, New York. Brother Larry is the jokester.

  What's your best lumber joke?

• Larry Beckerle, Co-Owner, Beckerle Lumber:

  If I told you, you would get board.

  (LAUGHTER)

• Paul Solman:

  Oh, board. I finally got the pun.

  But the Beckerle are dead serious about the business. They buy railroad cars full of lumber shipped from the Pacific Northwest.

• Stephen Beckerle:

  So, a carload of lumber in March of 2020 cost me, on average, let's say, $50,000.

• Paul Solman:

  That was the usual price, $300 to $400 per 1,000 board feet. Then, suddenly, COVID, and an economy on the brink of paralysis.

  Stinson Dean, Founder and CEO, Deacon Lumber: And, for one month, new home sales and new home starts, everything just plummeted.

• Paul Solman:

  Lumber trader Stinson Dean.

• Stinson Dean:

  So, producers just shut it down. They got rid of any inventory they owned, and they stopped producing anymore.

• Paul Solman:

  Retailer Beckerle's thinking at the time was typical.

• Stephen Beckerle:

  We're going to minimize what we're stocking.

• Paul Solman:

  But business didn't collapse completely, and with too little supply to meet even weak demand, by summer 2020, lumber prices doubled.

• Stinson Dean:

  No one has ever seen $700 lumber. That was pretty astonishing. But then it went to $800, and $900, and $1,000.

• Paul Solman:

  And retail prices took off accordingly, says contractor Kevin O'Dell.

• Kevin O’Dell, Home Improvement Contractor:

  Plywood and 2×4 lumber and stuff three or four times higher than it was.

• Paul Solman:

  And then, in the spring of this year?

• Stinson Dean:

  Eleven hundred, $1,300. $1,700 by May.

• Stephen Beckerle:

  A carload of lumber in May cost me over $200,000.

• Pete Beckerle, Chairman, Beckerle Lumber:

  I didn't believe it.

• Paul Solman:

  Pete Beckerle, the family patriarch, has a motto.

• Pete Beckerle:

  Like we're sitting on a staple, 2x4x8s. Don't run out of 2x4x8s. It's like the butcher running out of hamburger. But we didn't always make it.

• Paul Solman:

  Because demand kept growing.

• Larry Beckerle:

  People didn't take vacations. They didn't travel. So people are investing back in their homes. They can work remotely, so they can live anywhere. So, people are moving out of the cities. They're moving to suburbs, like right here in Rockland County, New York.

• Paul Solman:

  Dominique Ward's family, for instance, which moved from Queens.

  So you bought lumber during COVID?

• Dominique Ward, New York Resident:

  Yes, I did.

  (LAUGHTER)

• Dominique Ward:

  I built garden beds. I built a deck. I also built a fireplace. I built an ice skating rink for my kids in the winter last year.

  It was 20-feet-by-20-feet ice skating rink in the middle of the yard.

• Paul Solman:

  And you were not price-sensitive?

• Dominique Ward:

  I was not price-sensitive. I wish I was. But I wasn't.

  (LAUGHTER)

• Dominique Ward:

  I wasn't.

• Paul Solman:

  It turns out even our cameraman, David Zapatka, his job displaced by Zoom, turned to home improvement.

  David Zapatka, Director of Photography: I was bored. We had just done a major project on our house, in the kitchen. And I looked out and looked at the deck. And I said, man, that deck is just a mess. So, I bought $1,000 worth of tools and I went to town.

• Paul Solman:

  Demand was back convincingly.

• Stinson Dean:

  So, now how long does it take for the industry to believe that we're back? That took about six or seven months.

• Paul Solman:

  Then, given labor shortages and ongoing supply problems due to climate calamities, it took more time to ramp up. But, once it did, price responded rapidly.

• Stinson Dean:

  As quickly as it went up, it went down twice as fast. It was about a six-month ride up to $1,700. And, in three months, it was it was back down to really close to pre-COVID levels.

• Paul Solman:

  And yet, today, the price is back above $1,000 per 1,000 board feet. That's mainly a function of sustained new homebuilding, says housing economist Ali Wolf.

• Ali Wolf, Chief Economist, Zonda:

  In the case of new construction, we see that, year to date, activity is up 15 percent compared to 2019 levels.

• Paul Solman:

  And with higher lumber prices?

• Ali Wolf:

  Home prices are rising, as are rents.

• Paul Solman:

  All of which is fueling inflation.

  So, you have probably figured out by now the roller-coaster metaphor we began with, which came courtesy of MIT Professor John Sterman, who put capitalist market cycles in context here on the "NewsHour" back when Soviet socialism was collapsing.

• John Sterman, MIT Professor:

  So, what we have done is created the simulated beer company which you will manage over the next hour-and-a-half.

• Paul Solman:

  A role playing game in which each team represents a link in the beer supply chain.

• John Sterman:

  So, it's a balancing act. You want to have inventories as low as possible, but you don't want to run out.

• Man:

  We don't have anything coming in, and we're going to get into demand in a hurry, and we're going to stock out.

• Paul Solman:

  Oh, my God. We are going to — we have nothing coming.

• Man:

  We have zero coming in.

• John Sterman:

  Stock-outs lead to panic orders, and customers who can't get what they want start ordering more than what they really need, and they start hoarding inventory. And that, of course, makes everything worse, in a kind of vicious cycle, self-reinforcing process.

• Paul Solman:

  Sterman has actually come up with a new prop for today's supply chain disturbances.

• John Sterman:

  A Slinky. So, I actually have a Slinky here.

  Think of my hand here at the top as consumer demand and think of the bottom as production. And in the real world, demand is always fluctuating a little bit at random.

• Paul Solman:

  And those rings in the Slinky, those are the different elements of the supply chain. Is that it?

• John Sterman:

  Yes, the different links in the chain, the time delays in the chain, how long it takes to build new capacity and so forth. And it creates these cycles that we have seen forever.

  But, occasionally, a really big disturbance can hit, you know, pandemic! And well, now the system, it's going to really go nuts, and it will take quite a while for it to settle back down.

• Paul Solman:

  But what we all care about these days, of course, is inflation.

  So, I asked housing analyst Wolf, is lumber a good proxy for inflation or just a quirky one?

• Ali Wolf:

  I think lumber is a great proxy for inflation.

  We have seen how choppy lumber prices have been. I think that's what we expect to see in a lot of different items across the economy as we go through next year and try to sort through the supply chain challenges and the labor shortage.

• Paul Solman:

  So that suggests a shorter-term, rather than a longer-term phenomenon, right?

• Ali Wolf:

  Our belief is that costs will stay high, but throughout 2022, we will see the rate of growth start to come down.

• Paul Solman:

  John Sterman agrees about lumber, given today's high price.

• John Sterman:

  Mill owners and the forestry industry are saying profits are fantastic. Let's build new mills and grow the capacity of existing mills. And so those new mills will keep coming onstream, and now there will be excess capacity. And that's going to then push prices down.

• Paul Solman:

  So are you suggesting that this inflation that we're experiencing in lumber and pretty much everything else is really a temporary phenomenon?

• John Sterman:

  Well, some of it is, but there's other forces driving inflation now, and might get much worse.

• Paul Solman:

  Sterman is invoking the classic definition of inflation, too much money, or liquidity, chasing too little to buy, driving up prices, which drive up wages, and so on, the so-called wage-price spiral.

• John Sterman:

  There's a big debate going on among economists, some people arguing it's transitory, because it's just the supply chain, and other people arguing, no, it's now going to be baked into this wage-price spiral, enabled by excess liquidity in the system.

  And the reality is, it's both, and nobody knows how that's going to play out.

• Paul Solman:

  Nobody knows, which will surprise nobody familiar with economics.

  For the "PBS NewsHour," and still in the game, Paul Solman.