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Last fall we refinanced our home to take advantage of the historically low interested rates. We shaved over 1% off our rate, cashed out enough money to put on a new roof, and lowered our monthly payment. By the time we got our refinancing done, it was too late into the year for our preferred roofer to do the work. It’s an old 2-story farmhouse with a steep pitch and partial wood shingles underneath a couple of layers of asphalt shingles that will require a complete tear-off and re-decking. He lays off some of his crew through the winter and wouldn’t have enough manpower to do the job until spring. We weren’t having any issues with our roof and since we’re fairly responsible with our money, the cash could sit in the savings account till he’s able to come.
Fast forward to spring and we have a different problem: lumber prices (and other building materials) have skyrocketed. Unfortunately, our roof will require more lumber than the typical roof job which makes our original quote moot. I’m waiting on him to re-work our quote with the higher prices but we may have to wait till prices come back down some (or for a good hail storm).
There’s a lot of explanations for why lumber prices have ballooned. Increased demand from lockdown DIY projects. Homebuilders trying to fill a housing shortage spurred by low-interest rates. Production and supply chain delays because of COVID shutdowns. Trade barriers that make importing lumber more expensive (Thanks Trump!).
Those are all part of it, but there’s another that rarely gets mentioned: inflation.
When most people hear inflation they think of higher prices only. As Kevin Williamson (I know, I know, he didn’t like Trump so his opinion doesn’t matter) points out:
“If you look around for inflation the way most people think of it, you won’t see a lot of it. “Core” consumer prices, as they are known, have been pretty flat, and what rise in prices that consumers have seen has mostly been in oil. But, in spite of the way the term is used, inflation really should not be treated as a synonym for a general rise in consumer prices. Inflation is an increase in the money supply not linked to an increase in economic production — rising prices are one possible consequence of inflation, but are not inflation itself.”
This seems largely true. The US Government has been pumping money into the economy like crazy. Stimulus checks to people who didn’t need it. Outlandish spending bills, one after the other with no means or intention to pay for it. Artificially low interest rates are driving real estate prices through the roof. It’s starting to show up in the conventional measurements too. Global financial institutions are also taking note.
Williamson highlights the increases in luxury items and investment vehicles such as cryptocurrencies but they’re happening closer to home too. Living in a rural, agriculture-dominated area, I’ve seen the prices of farm goods explode in the last year or two. Used farm equipment, farmland, and farm inputs such as fertilizer have gone sky high (the Trump Admin dumped billions of dollars to farmers over his term, especially in the final year). Things like guns, ammo, and swimming pools have seen similar increases (if you can even find them). Some of it is simple supply and demand and the price will move closer to equilibrium. Some of it is pure inflation.
The problem with inflation is it makes your dollar today worth less tomorrow. The cash-out re-finance we did in the fall now buys less roof today than it would have 6 months ago. If your money is worth less, it’s the same as having less. Milton Friedman said, “Inflation is taxation without legislation”. The government quietly inflates its currency so it can bribe more voters in lieu of direct taxes which are more easily felt by the citizens. This is why it is sometimes referred to as “the hidden tax”.
If you know where to look, it doesn’t seem so hidden.Published in