Daily Brief: Bullet-Proof Costco Takes Inflation In Its Stride

Daily Brief: Bullet-Proof Costco Takes Inflation In Its Stride

over 1 year ago3 mins

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Costco’s quarterly numbers, out last week, showed a company in rude health despite tough economic conditions.

What does this mean?

Costco, the Goliath members-only retailer, updates investors on key metrics every month, so the quarter’s 15% jump in sales won’t have come as much of a surprise. Expected or otherwise, though, that upturn is impressive in the current climate – as is the fact that profits are up 8% even as operating costs creep skyward. (Costco shelled out 8% more to suppliers than it did at the same time last year.) So far, then, Costco seems to have managed to pass on increased costs without scaring away shoppers: we’ll know whether rivals like Target and Walmart have been able to do the same when they publish their quarterly numbers in November.

US inflation
Source: The Wall Street Journal

Why should I care?

Zooming in: Join the club.

In a time of rising prices, one fee hasn’t budged: Costco’s $60 Gold Star annual membership (a steal considering the bargains on offer in the firm’s warehouses). Some shareholders have grumbled that the fee should be hiked to plump up profits, but with membership renewals at an all-time high of 93% in the US and Canada, Costco will be slow to tinker with its winning formula.

Costco stock
Source: Google Finance

The bigger picture: The Costco price index.

Costco famously sells a lot of stuff: the bargains that line the store’s shelves range from everyday groceries to things like car tires and massive 340-pound safes. Stocking such a diverse set of products means the firm keeps an eye on all kinds of markets – and according to its finance chief, there has been some good news: the prices of fresh foods like beef and commodities like steel have come down a tad since last year. And with shipping costs dropping and deliveries to Costco warehouses arriving more promptly, it looks like supply chains might be improving too. Consumers, then, might breath a tentative sigh of relief.

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The UK’s Not-So-Mini Budget Slashes Tax

UK mini budget image

The UK’s mini-budget laid out plans to kick-start the economy on Friday – including some whopper tax cuts.

What does this mean?

The UK’s got problems aplenty right now, and it looks like the government’s settled on a solution: cutting taxes left, right, and center. Friday’s mini-budget slashed taxes to the tune of £45 billion ($49.7 billion) in the biggest set of cuts in 50 years. The new measures lower the basic tax rate from 20% to 19%, and outright abolish the top rate of 45%. The cap on banker bonuses has also been scrapped – meaning that now might be a good time to invest in vintage champagne. Along with these moves comes the decision to lift the ban on shale fracking: environmentalists are not likely to be pleased – but tough times call for bold plans, and this plan is nothing if not that.

Mini-budget tax cuts

Why should I care?

Zooming out: Markets’ vote of no confidence.

After digesting the mini-budget with a nervous gulp, the FTSE 100 – the UK's key stock market index – dropped nearly 2%. But the real drama was in the currency market, where the pound plunged to a 37-year low in the wake of the news. Weakening currencies can suggest a government’s losing credibility, and credibility’s important when you’re planning to borrow money (as the UK is right now). So, although the government is counting on debt-financed tax cuts to nitro-boost growth, a full 2% drop in the pound versus the dollar suggests investors are far from convinced.

Pound falls

The bigger picture: The great British see saw.

The Bank of England (BoE)’s latest statement declared war on inflation – so it’s likely to have some strong opinions on the government’s latest plan. See, cutting tax to stimulate growth makes sense when the economy’s sluggish but when inflation’s already running hot, it risks adding fuel to the fire. This looks like a tug of war between the BoE and the government – and it’s anyone’s game right now.

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