LIFO and the Muted Inventory Response to Inflation Expectations

Firms tend to increase inventory when they expect input prices to rise, buying ahead to lock in lower costs. We first provide evidence that the stockpiling channel, rather than a lower real cost of capital, is the primary driver of the positive relation between inventory and inflation expectations. We then find that the Last-In, First-Out (LIFO) inventory method significantly dampens this response, consistent with LIFO muting the short-term earnings benefit of buying ahead and potentially weakening managers' incentive to stockpile. This attenuation is stronger among firms with larger LIFO reserves, consistent with LIFO liquidation substituting for proactive stockpiling. Using Section 301 tariffs and physical import quantities from Bills of Lading, we provide corroborating evidence that these patterns reflect real behavioral differences rather than mechanical valuation effects. <br>