Three weeks ago we were looking at US retail inventories—the question was if the inventory levels building up were because demand was dropping—the starting point of a recession. The reasons were likely different. Today I read another article about retail inventories, and this time the story is that huge inventory levels might lead to inflation reversing itself again.

What that’s about?

How can high inventory levels defeat inflation?

Wood’s argument goes like this:

  • retailers are drowning in stuff that isn’t selling
  • warehousing stuff costs money
  • if retailers are just storing stuff that isn’t selling, they’re basically burning money
  • so, they’ll have to offer discounts to get rid of their inventory
  • discounting stuff means lower prices
  • lower prices means inflation drops

If that story turns out true, then people need to spend less on essentials. They need to worry less about financials. That means they have more money to spend on other things, demand goes up, and the recession runs for the hills. Eeryone’s happy.

But does that story make sense? Maybe not.

What is inflation? And how do you measure it?

Inflation means that things get more expensive. Last year, orange juice might have been $2 / l, this year it’s $2.5. If that happens across the board of what normal people buy—that’s inflation.

A different way of looking at inflation is that your money is worth less: With $10 you could buy 5l of orange juice last year. If you held on to that cash it’s now worth only 4 liters.

How do you measure that? You could for example go year by year to the same supermarket, sum up the price of the same things every time and you get an idea if things got more expensive (and your money lost value).

The “Consumer Price Index” (CPI) is one of the metrics used. While it’s not perfect (see box), it’s what the headlines use.

An imperfect Consumer Price Index (CPI)

Inflation is often gauged using the Consumer Price Index (CPI). You get that number by comparing how much more expensive stuff gets over time. So, every so often you get the prices for that “basket of goods”, you weigh them (for example you might give more importance to food than to cinema tickets) and then you get a number.

What stuff would you be looking at? Canned ravioli? Foie gras? For the US, the Bureau of Labor Statistics looks at what people buy:

all goods and services purchased for consumption by the reference population

(Source: See their FAQ)

They also admit that CPI maybe won’t capture how you feel inflation in your wallet:

The CPI does not necessarily measure your own experience with price change.

And they even say that CPI won’t capture the cost of living—because people change what they buy depending on how tight money is or might become. (In other words: demand changes in a recession.)

Why is inflation running high in 2022?

There are all kinds of opinions. Here are some, in no particular order:

  • it’s the war in Ukraine. Wheat is stuck in Ukraine. Sanctions against Russia mean that wheat and oil won’t be bought. and that’s apart from all the other things that Ukraine and Russia produce that aren’t making it to buyers. (this is a supply-side argument)
  • companies use this opportune moment to turn a hefty profit
  • the US shelled out too much cash to the population
  • the Fed (the central bank of the United States) and other central banks shelled out way too much cash since 2008
  • workers are getting high pay raises
  • the economic shutdowns that governments did to fight the pandemic also disturbed supply chains.

I’m doing the unpopular thing and assume it’s a combination of these. I’ve read reasons for each individual thing but not anything that convinced me that one was supreme.

Why are US inventory levels so high? What is being stockpiled?

As discussed in another article, retail inventories are high because retailers ordered a lot of inventory during the pandemic. But what people bought while stuck at home is different to what they want to buy now. So, retailers basically got the wrong things in stock.

Where do you find aggregate retail inventory data for the US?

You can find the Advance Economic Indicators reports at the U.S. Census Bureau. Go down to “Report by Table”, then download the Excel spreadsheet under the “XLSX” link.

What to do with that inventory? Warehousing indeed isn’t free, and that’s why Walmart and others have announced that they’ll be selling these unwanted things at a discount.

Retail inventory and inflation

The question is, will those discounts really affect inflation? Maybe a bit but likely not much. Many of the things that got expensive are food and fuel. And that’s not what retailers have too much of. While those items will be part of CPI calculations, that’s probably not what’s going to bring prices down.

So maybe I’m missing something but that argument that high inventory levels will bring prices down doesn’t seem to work out.