Labor, Not Lumber, Will Drive Inflation
As supply catches up to demand, higher prices for commodities will probably subside. That's not necessarily so for service worker wages.
Rising wages will tell us how much to worry about inflation.
Source: Bloomberg
Will the next few years of inflation data look more like the lumber market or the labor market? Will higher prices, driven by supply shortages related to economic reopening, be transitory, or will they be sticky, the way wages tend to be?
We won't know the answer for at least several months, during which we're probably going to see higher prices across a range of goods and services. Ultimately the outcome will determine whether the current mix of fiscal and monetary policy is appropriate or whether we'll have to act faster to rein in inflation.
In the lumber market, prices are at record highs, challenging the construction industry as it races to build more homes to address the national shortage of housing inventory. The shortage is due to high demand, as well as from a lack of supply after sawmills paused production last spring during the onset of the pandemic. There's also been a structural decline in the number of sawmills over the past decade because of persistent weak demand for lumber after the 2008 financial crisis and housing bust.