Board of Governors of the Federal Reserve System
10/15/2025 | Press release | Distributed by Public on 10/15/2025 08:39
Retail inventories and inflation dynamics: The price margin channel
October 2025
Retail inventories and inflation dynamics: The price margin channel
Neil Mehrotra, Hyunseung Oh, and Julio L. Ortiz
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 2009-2011 and the COVID-era surge.
Keywords: Inflation; inventories; supply disruptions; Phillips curve.
DOI: https://doi.org/10.17016/IFDP.2025.1424
PDF: Full Paper
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