Stack ‘em high, and sell ‘em cheap. A deflation pulse is coming.

Shops are stuffed full of goods. How do they get rid of them?

In any business, whether its goods-related or services, a high turnover is crucial. Sure, some can survive with a stable and loyal clientele, but for most, new (or repeating) customers is what counts. Anticipating the level of future demand is a key element in running a business, especially one that sells physical “stuff.” Business owners will build inventory (goods meant for selling) when they think demand is high and run a low inventory when it is thought weak. Therefore, inventory levels are worth watching.

The chart below shows the annual percentage change in inventories across U.S.-based businesses. The series only goes back to 1993, but you can see that the inventory build-up over the past 18-months has been historic, accelerating at a 16% pace in April. Companies have been increasing stock due to rising demand but also because of supply chain issues. Unsure of whether they can get their stock delivered, companies have been over-ordering for months.

However, now that the global economy appears to be moving towards recession, said companies will no doubt be having crisis meetings about how they can offload their stock of goods. The obvious and classic solution is, of course, to lower prices.

As we move further into the second half of 2022, there’s a strong probability that prices of goods in shops will be cut. That might not mean that headline consumer price inflation will decelerate, food and energy being a big component of course, but it does mean that a price deflationary pulse will be present.