Signals from Costco on inflation are keeping us from overreacting to hotter producer prices

Published Fri, Dec 9 20224:50 PM EST

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Wholesale prices in November may have been slightly hotter than expected, but next week's look at consumer prices is the one that may solidify the Federal Reserve's upcoming interest rate decision. Ultimately, we think the November consumer price index (CPI) holds more weight with the market and the Fed than Friday's wholesale figures, known officially as the producer price index (PPI). Before overreacting to Friday's print , also consider what Club holding Costco (COST) said about inflation in its quarterly results after the closing bell Thursday — it appears to be trending down, albeit slowly, even as a few areas like fresh foods remain sticky. "Recall last quarter and fourth quarter, we estimated year-over-year price inflation was about 8%. In the first quarter, we estimate the equivalent year-over-year inflation number in the range of 6% to 7%," Costco Chief Financial Officer Richard Galanti said on the company's fiscal first-quarter earnings call . "A few things are up, but overall, we're seeing a little bit of a trend," he added. At the headline level, what the retail giant is seeing seems directionally in line with what Friday's wholesale price report indicated. The PPI rose 7.4% year over year , slightly hotter than the estimate of a 7.2% jump. However, November's headline figure is down from the revised 8.1% annual rate registered in October and 8.5% in September. The 7.4% increase in November also is the slowest annual jump in wholesale prices since May 2021. The downward trajectory on an annual basis continued despite increases across multiple food categories including fresh and dry vegetables. The PPI rose 0.3% on a month-over-month basis — slightly above the 0.2% estimate, but the same rate of increase seen in October and September. The 3.3% year-over-year jump in the PPI's food index is one of the more concerning data points, representing a big increase from both October's 0.8% rise and September's 1.5% increase. While Costco spoke to some food pressures — similar to what Friday's PPI showed — we feel good about the fact Costco management did not warn of a serious reversal in inflation trends. To be sure, Galanti reminded investors it's a fluid situation, saying "we'll keep you posted" on the price pressures it sees. But, as of now, the CFO signaled favorable movement on prices of commodities like corn flour, sugar and butter. Friday's PPI did not materially change expectations on what the Fed might do Wednesday at the conclusion of its two-day December policy meeting. The market still expects the U.S. central bank to raise interest rates by a half percentage point, which would represent a deceleration from its aggressive past four decisions . The Fed has lifted rates by 0.75 percentage points at each of its past four policy meetings, starting in June and most recently in November. In total, the Fed has raised interest rates six times this year to bring its target policy rate to between 3.75% and 4% in an attempt to slow the hottest U.S. inflation environment seen since the early 1980s. Bottom line We expect the Fed to go through with a half percentage point increase Wednesday unless Tuesday's CPI number comes in scorching hot and throws into question the belief that peak inflation is in the rearview mirror. In our minds, those hopes are still alive especially after hearing from Costco that trends still appear to be heading in the right direction. (Jim Cramer's Charitable Trust is long COST. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A butcher stocks a display case with packages of steaks at a Costco store on May 24, 2021 in Novato, California.

Justin Sullivan | Getty Images

Wholesale prices in November may have been slightly hotter than expected, but next week's look at consumer prices is the one that may solidify the Federal Reserve's upcoming interest rate decision.