LIFO AS A SPUR TO INFLATION--THE RECENT EXPERIENCE OF COPPER.
Abstract In sum, under Lifo, inventories no longer perform the function of taking up the slack between production and sales. Rather, inventory management policies are determined in the main by the artificial relationships developed above. The end result is a situation that accents, rather than mitigates, the undesired effects of business fluctuations by creating inflationary pressures that would other- wise be absent. The expansion and contraction stages of the inventory cycle are exaggerated, and inventory investment becomes an even more volatile component of private gross capital formation than has been in the past In the case of copper at least, the greater stability of reported earnings under Lifo does not appear to have resulted in the hoped for effect of reducing investment during the boom. Most industries that use Lifo do not have an institutional pricing structure and complete substitutability of product such as that found in copper. However, in these other industries, Formula (1) can be employed to determine the "grey" or "black" market price that a Lifo company can afford to pay for each unit of a commodity in order to improve its marginal cash position. For example, a steel company can use Formula (1), adjusted for smelt charges and technological factors, to arrive at the limit price that it can afford to pay for scrap. Or, if smelter capacity is not available and the Lifo base stock is seriously depleted, Formula (1) can be used as a guide in determining the price to be paid for scrap metal to be used to build up a processed metal inventory if permitted by the Bureau of Internal Revenue. Both Table 1 and Formula (1) are based on the simplifying assumption that the Lifo base stock is homogeneous in composition with respect to the cost of each unit of inventory.
- DOI
- 10.2308/tar-7133512
- Volume
- 32 (1)
- Pages
- 42-50
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref