Times, they are a changin'. It was just about 6 months ago that I sat down with Costco management and heard things that gave me chills. Part of it, I'm sure, was the fact that it was the day before they preannounced a Q4 (August fiscal year end) earnings shortfall, so they were glum anyway (although we didn't know about that until 12 hours later).
Back in July the discussion was all about inflation: food inflation, gas inflation. Remember that it was mid-July that gas prices peaked nationwide. Gas prices are now down 58% from that level. Fifty. Eight. Percent. Today on their first quarter conference call Costco confirmed that they are now also getting price concessions from suppliers on goods that had gone up significantly just a few months ago. While I want to be clear that they didn't specify where they are currently getting concessions, some of the major price increases had been for goods that used petroleum products (plastics, etc). You can bet those prices are headed down. In fact, it was a source of great pain for them that they had to take the price on their rotesserie chickens up from $4.99 to $5.49 to $5.99 all within the course of 6 weeks because of food price inflation. Guess what? They're back down again.
Gas, which was a source of huge LIFO charges because of inflation (if you want an explanation of how and why that accounting even exists, you'll need to find someone smarter to explain it), has now swung completely the other way. And whereas it was at best a teeny profit margin (perhaps even sometimes a bit of an unintentional loss leader) in July and August, it was for a bit of time these last few months 'wildly profitable' according to Costco. (Because they sell so much gas, they buy gas cheaper faster as the price is dropping, but can still stay at really cheap prices to consumers while their cost drops faster.)
There's been a lot of consternation about the huge amount of economic stimulus the government has been pumping into the economy in the name of stabilization, mostly because the great fear of further inflation. Eventually that may happen. Heck, look at what happen when they took interest rates down and flooded cash into the market at the turn of the century (see my August 2008 Post Modern fairy tale for more information). But I'm here to tell you, we can't see the whites of inflation's eyes from this vantage point. We'll remain vigilant. But in a really quick turn of events, we're much more troubled by the looming deflation at this point.