Let me talk about 2 x 4s today – those studs that DIYers, myself included, test regularly – to illustrate the good news about inflation?
Posted at 6:30am
For the first time in several months, the current rate of inflation fell last month, Statistics Canada said. It rose from an annual increase of 8.1% in June to 7.6% in July in Canada (and even 7.3% in Quebec).
In itself, that’s good news, although the phenomenon is largely explained by the recent drop in gas prices, hence the caution of many economists.
But it’s not this good news that I want to share with you. My comments are more focused on the leading indicators that will affect the prices consumers will pay in the coming months, including those affecting the famous 2x4s and other materials.
The lumber prices of the major manufacturers have not increased in recent months, but have fallen dramatically.
At the beginning of May, you had to pay more than $1,000 per foot of board – the unit used in the market – a price that has fallen to around $550 in the past few days, a 45% drop!
These types of fluctuations are not immediately reflected in the up or down prices paid by consumers. Apart from the fact that sooner or later the prices will be adjusted. FYI, 8-foot spruce 2x4s sell for $5.39 a unit these days.
Lumber is not the only sector affected by the price declines. For an entrepreneur who wants to ship his products by container, the news is good: the global average price for chartering a 40-foot container has fallen 27% in the last three months to US$5,989.
Similarly, prices for metals and minerals (-9%), energy (-12%) and even Canadian agricultural products (-9%) are according to indicators from the very credible Bank of Canada. So, overall, the price of all products is down 14% over the past three months.
“There are many signs pointing to a lower price in global supply chains. The recent drop in product prices is widespread and will later be reflected in the Consumer Price Index (CPI),” said National Bank Chief Economist Stéfane Marion.
However, another important element comes into play: the price of labor, especially services. Workers everywhere are demanding wage increases that offset inflation, which in itself will likely stimulate higher prices.
This important component of inflation needs to be analyzed using the unemployment rate. As long as job creation remains solid, pressure on wages will remain strong. However, we can expect that the rise in interest rates will slow the economy, reduce corporate profit margins and constrain the labor market, leading to wage increases.
Another factor: living space. Again, rising mortgage rates, while inflationary for real estate, will ultimately dampen the real estate market and its price increases. Several observers are also noting that the market has already started to cool down and are anticipating significant price declines.
In this context, National Bank economists estimate that the Bank of Canada will have to raise its key interest rate again on September 5, this time by 75 basis points. For its part, the Mouvement Desjardins predicts an increase of 50 points.
Among other things, higher interest rates encourage savers to invest more money than they spend.
“Following this new rate hike, the Bank of Canada will pause to see the impact of its monetary policy on the economy,” believes Marion.
In any case, the economist forecasts that the CPI increase will fall below 5% in December compared to December 2021.
This slowdown in inflation can be explained not only by the fall in the price of many products but also by what is known as the “base effect”. For example, the price of gasoline at $1.80 per liter is certainly high, but there comes a time when its level is compared to the same month last year when it was already so high, which in such a case translates into zero inflation will knock down case.
Given these observations, the Quebec Treasury Department’s forecast of a decline in the average inflation rate to 3.2% in 2023 and then to 2% in 2024 is not that far-fetched.