It’s been a double whammy for pandemic-weary consumers: Not only have they endured shortages of everything from toilet paper to furniture and food, they have been paying higher prices for the dwindling number of goods that remain in sectors like electronics.
Those shortages, known as stockouts, tend to drive up prices, typically for three to four months. But as the COVID-19 pandemic wears on, some shortages, especially food and electronics, are likely to linger much longer. That means higher prices are probably here to stay for a while as well, according to research by Alberto Cavallo, the Edgerley Family Associate Professor of Business Administration at Harvard Business School.
Prices in the United States rose at the fastest pace in four decades in January, adding pressure to the Federal Reserve to cool the economy before inflation undercuts wage growth and spending. Cavallo’s research sheds light on a question vexing economists, consumers, and retailers alike: When will prices return to normal? The answer depends on the type of product, and how quickly each individual industry recovers, says Cavallo.
When a product is unavailable for a long time, retailers often stop carrying it, a phenomenon the researchers call “permanent stockouts.” These are persisting in some sectors and are contributing to keeping prices stubbornly high, suggest Cavallo and the Bank of Canada’s Oleksiy Kryvtsov in their recent working paper, What Can Stockouts Tell Us About Inflation? Evidence from Online Micro Data.
Early in the pandemic, Cavallo says, he thought stockouts would ease within a few months. “The composition of the stockouts changed over time. The temporary ones, which are visible in empty shelves or out-of-stock signs online, have fallen, but the discontinued goods remain high in some categories,” he says. “Those shortages are putting pressure on prices. And they're still contributing to the high levels of inflation we see now.”
Shifting shortages on store shelves
To examine the relationship between stockouts and inflation, the researchers parsed data from the websites of 70 large retailers using PriceStats, a firm Cavallo co-founded in 2010. In all, researchers examined nearly 2 million products sold online and in brick-and-mortar stores in seven countries, including more than 777,000 in the United States.
The authors measured price changes for those products from Nov. 1, 2019 until May 1, 2021, which Cavallo notes was before supply chain issues intensified even further last summer in some areas, including the US, Canada, China, Japan, and sections of Europe.
The goods examined cover 62 to 80 percent of the Consumer Price Index (CPI) weighted categories, including food and beverages, health products, household items, electronics, and personal products like shampoo.
As the researchers looked closely at what stores were carrying, it became clear that three distinct phases to stocking woes emerged:
- At the onset of the pandemic, a huge rise in temporary and permanent stockouts affected most countries and sectors. In the US, stockouts rose from a pre-pandemic level of 19 percent to more than 35 percent by early May 2020. Stockouts started in health and personal goods but spread to other categories swiftly.
- The composition of shortages changed over time. After a year and a half, most inventory hit by temporary stockouts returned to pre-pandemic levels and inflation waned, “suggesting a gradual return to normalcy,” the researchers write. Yet in some areas, shortages turned into permanent stockouts. In April 2020, roughly 20 percent of products tracked by the researchers had been discontinued. That number hasn’t decreased much since then.
- Stockouts remain high in fewer sectors. Shortages remain significant in some sectors, such as food and beverages and electronics, but are back to normal in others. Toilet paper, for example, was in short supply early in the pandemic, but has become more widely available.
Why empty shelves mean rising prices
Missing merchandise is a sign that retailers are facing higher costs of replenishing inventories, which leads to higher inflation. In the US, a stockout rate that climbs from 10 percent to 20 percent translates to a 0.1 percentage point increase in monthly inflation, the researchers say. In March and April 2021, prices were at the highest levels in a decade, the researchers found.
Once a stockout goes up, inflation follows about a month later. That rise usually peaks about seven weeks later, impacting prices for about three months before they start to decrease, the researchers note.
By May 2021, permanent stockouts again reached 20 percent in some sectors, persisting mainly in food, beverages, and electronics. That made the remaining products more expensive, and inflation settled in for longer than expected, the researchers write.
In short, during a long, disruptive event like a pandemic, some products are no longer available to consumers. Those that remain will cost more, which is exacerbated by supply chain costs. That’s where inflation continues to linger.
“In recovered sectors, inflation is likely to return to pre-pandemic levels. In sectors with elevated shortages, inflation outlook will depend on how quickly the shortages dissipate,” the researchers write.
When will it end?
Although the pandemic has forced retailers to cut back on the variety of goods they sell, most sectors should eventually return to normal, Cavallo says.
“The problem right now is that demand is increasing in a context of limited supply,” Cavallo says. “So, if there are no more supply disruptions, I don't see why we won't get back to seeing the same level of product variety that we had before.”
But for now, could inflation continue to spiral? Not necessarily, Cavallo says, although he cautions that recovery could take a while.
“Even if the supply disruptions ended today, our results show that the price impact tends to last for many months,” Cavallo says, “so we might be looking at having higher-than-normal inflation levels for a while.”
[Image: iStockphoto/Eloi_Omella]