Over the last several decades, the influence of inventories on the business cycle has steadily diminished. This decline was the result of a number of factors, including globalization and computing power. Yet, given the economic tumult related to the pandemic and the war in Ukraine, many companies have found themselves excessively short of inventories and in desperate need to rebuild.
More recently, others are finding themselves with excess supply, with some market commentators suggesting this could quickly result in deflation as these stocks are liquidated. The result today is a slightly confusing picture of just what the current inventory situation looks like. Meanwhile, looking a little further out, as the supply-chain situation normalizes, companies may also be forced to consider whether something structural has in fact changed, and if so, what level of inventory will be needed to reflect this new world order.
In this Economics Weekly, we discuss the near-term and possible longer-term inventory outlook.
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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.