Costco disagrees with the Federal Reserve on the future of inflation

Brian Sozzi
·Executive Editor
4 min read
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Retail giant Costco may be offering the clearest signs yet that the current inflationary spike the U.S. is experiencing as the economy emerges from the grips of the pandemic will be anything but transitory as countless Federal Reserve members continue to trumpet.

"Chips shortages are impacting many items from an inflation standpoint, some items more than others. And with regard to containers and shipping, transportation costs have increased as well. This will continue — the feeling is that this will continue for the most part of this calendar year," warned Costco CFO Richard Galanti on the company's latest earnings call.

Continued Galanti, "We've had a lot of questions about inflation over the past few months. There have been and are a variety of inflationary pressures that we and others are seeing. Inflationary factors abound. These include higher labor costs, higher freight costs, higher transportation demand, along with the container shortage and port delays, increased demand in various product categories, various shortages of everything from chips to oils and chemical supplies by facilities hit by the Gulf freeze and storms and, in some cases, higher commodity prices."

Galanti pointed to particular inflationary pressure in beef, paper goods and aluminum foil.

Signs of red-hot inflation are abound at the moment.

The core personal consumption expenditure (PCE) price index increased faster than expected, up 3.1% in April, according to the U.S. Commerce Department. Federal Reserve officials view the index as among the best indicators of pricing pressure in the economy. The Fed believes 2% inflation is a healthy level. Meanwhile, the April Consumer Price Index (CPI) rose at the fastest pace since September 2008, clocking in with a 4.2% increase versus a year ago.

CEOs at some of the biggest consumer products have told Yahoo Finance they are aggressively raising prices to protect their profits from inflation.

'In the short-term, it is an upside risk'

To be sure inflation remains one of the biggest risks to stocks in the near-term, strategists tell Yahoo Finance. The concern among those forecasters on the Street: Investors aren't pricing in a longer duration of inflation this year, which could prove to be a surprise headwind to earnings growth.

"I think all of these things [worker and auto shortage] are probably going to be much less of a factor once we get into the fall. So, I am not too worried about it. But in the short-term, it is an upside risk. Longer term, I think the key questions really are is the economy going to overheat and are we going to move far beyond the potential long-term sustainable level of household unemployment. If that were the case, then I think you would have to be more worried about inflation in the longer term. But we don't really expect that," Goldman Sachs Chief Economist Jan Hatzius said on Yahoo Finance Live.

Goldman's economic team led by Hatzius recently boosted its CPI forecasts "significantly further." Hatzius sees CPI increasing by 3.6% year-over-year in June, helping to drive full-year CPI to a 3.5% gain. CPI is forecast to increase 2.7% in 2022, per Goldman's estimates.

Despite the headline-grabbing inflation reads, most inside the Federal Reserve have reiterated that the pricing pressure is transitory (or for a few months).

Federal Reserve Vice Chair Richard Clarida told Yahoo Finance's Brian Cheung last week that inflationary pressures “will prove to be largely transitory.” Clarida acknowledged, however, the Fed stands ready to tamp down inflation should it not be a transitory factor.

“We will recognize that and through our communication and our tools, I think we will be able to offset that in a way that would be supportive of maintaining the economic recovery,” Clarida said.

Perhaps the Fed should set up a Zoom call with Costco's Galanti for a true inflation read.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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