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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

Board of Governors of the Federal Reserve System published this content on October 15, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on October 15, 2025 at 14:39 UTC. If you believe the information included in the content is inaccurate or outdated and requires editing or removal, please contact us at [email protected]