Retail inventories and inflation dynamics: The price margin channel

Neil Mehrotra, Hyunseung Oh and Julio L. Ortiz
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Neil Mehrotra: https://www.newyorkfed.org/research/economists/mehrotra
Julio L. Ortiz: https://www.federalreserve.gov/econres/julio-l-ortiz.htm

No 1424, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Using industry-level panel data and plausibly exogenous variation in supply conditions, we estimate the elasticity of retail price margins with respect to inventories along the retailer's optimal pricing curve. We find that this elasticity is negative and statistically significant, implying that lower finished-good inventories lead to higher price margins. We assess the implications of this channel for inflation dynamics within a New Keynesian Phillips curve (NKPC) framework that links inventories to retailers' markup behavior. Incorporating the inventory-sales ratio into the NKPC markedly improves the model's empirical fit and helps account for two notable recent inflation episodes: the missing disinflation of 2009â 2011 and the COVID-era surge.

Keywords: Inflation; Inventories; Supply disruptions; Phillips curve (search for similar items in EconPapers)
JEL-codes: E22 E31 E32 (search for similar items in EconPapers)
Date: 2025-10-15
New Economics Papers: this item is included in nep-ind and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:1424

DOI: 10.17016/IFDP.2025.1424

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