It has become a double standard for consumers who are tired of the epidemic: Not only did they not tolerate the shortage of everything from toilet paper to furniture and food, they have been paying higher prices for the declining amount of goods left in sectors such as electronics.
That deficit, known as stock-outs, tends to increase in price, usually three to four months. But as the COVID-19 epidemic continues, some shortages, especially food and electronics, may continue for some time. That means higher prices are likely to stay here for a while and, according to a study by Alberto Cavallo, Edgerley Family Associate Professor of Business Administration at Harvard Business School.
Prices in the United States rose sharply in the last 40 years in January, adding to the pressure on the Federal Reserve to cool the economy before inflation cuts inflation and spending. Cavallo's research sheds light on a question that concerns economists, consumers, and retailers alike: When will prices return to normal? The answer depends on the type of product, and how quickly each industry recovers, Cavallo said.
When a product is not available for a long time, retailers often stop carrying it, which researchers call “permanent depletion.” This is still a trend in some sectors and contributes to high inflation, points out Cavallo and Oleksiy Kryvtsov of the Bank of Canada in their latest paper, What Can We Tell You With Inflation? Evidence from Online Micro Data (pdf).
At the beginning of the epidemic, Cavallo says, his thinking will subside in a few months. “The structure of the stock changed over time. Temporary, visible on empty shelves or signs off the stock online, have collapsed, but abandoned assets remain high in some categories, ”he said. “That shortage puts pressure on prices. And they are still contributing to the high levels of inflation we are seeing now. ”
Replacing shortages in store shelves
To examine the relationship between outflows and inflation, researchers separated data from 70 major retailer websites using PriceStats, a firm Cavallo founded in 2010. In all, researchers examined nearly 2 million products sold online as well as brick-and-mortar. stores in seven countries, including more than 777,000 in the United States.
The authors have estimated the price changes for those products since Nov. 1, 2019 until May 1, 2021, Cavallo noted that before supply chain problems intensified last summer in some areas, including the US, Canada, China, Japan, and parts of Europe.
The items tested comprise 62 to 80 percent of the weighted Consumer Price Index (CPI), which includes food and beverages, health products, household items, electronics, and personal products such as shampoo.
While the researchers looked at which stores they owned, it emerged that three different categories of stock-raising woes emerged:
At the beginning of the epidemic, a dramatic increase in short-term and permanent stock-outs affected many countries and sectors. In the US, stock depletion increased from pre-epidemic level by 19 percent to more than 35 percent in early May 2020. The outflow of funds began with health and personal goods but spread to other categories quickly.
The composition of the deficit changed over time. After a year and a half, most of the inventory that had been hit by temporary stocks returned to pre-epidemic levels and inflation declined, “suggesting a gradual return to normalcy,” writes the researchers. In some areas, however, shortages have become the norm. By April 2020, about 20 percent of researchers' products were cut off. That figure has not dropped much since then.
Shortages of funds remain high in a few sectors. Shortages are still important in some areas, such as food and beverage and electronics, but have returned to normal in others. Toilet paper, for example, was in short supply at the beginning of the epidemic, but it is now widely available.
Why empty shelves mean inflation
Missing sales are a sign that retailers are facing higher costs of replenishing inventories, leading to higher inflation. In the US, the average inflation rate from 10 percent to 20 percent translates into a 0.1 percent increase in monthly inflation, researchers say. In March and April 2021, prices were at the highest level in a decade, researchers found.
If stocks rise, inflation follows about a month later. The rise usually rises seven weeks later, affecting prices almost three months before it begins to decline, researchers say.
In May 2021, permanent stock depletion reached 20 percent in some sectors, concentrating mainly on food, beverages and electronics. That made the remaining products more expensive, and inflation lasted longer than expected, writes the researchers.
In short, during a long, disruptive event like a pandemic, some products are no longer available to consumers. The rest will cost more, which is compounded by supply chain costs. This is where inflation continues.
“In recovering sectors, inflation is likely to return to pre-epidemic levels. In sectors with high shortages, the perception of inflation will depend on how quickly shortages disappear, ”the researchers wrote.
When will it end?
Although the epidemic has forced retailers to reduce the variety of products they sell, many sectors must eventually return to normal, Cavallo said.
"The problem right now is that demand is increasing in the context of limited supply," Cavallo said. "So, if there is no more disruption of supply, I don't see why we should not go back to seeing the same level of diversity products we had before."
But in the meantime, can inflation continue to rise? No, Cavallo says, although he warns that recovery may take a while.
"Even if the supply disruption is over today, our results show that inflation tends to last for several months," Cavallo said, "so we may expect to have higher inflation rates than usual for a while."
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