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It's 'Inflation Nation' at Costco

A stroll through the local Costco finds Real Money's Jonathan Heller feeling the heat of inflation, and looking for hedges against it.

Jonathan Heller, writing in Real Money, is wearing out some shoe leather tracking down the impact of inflation on the Great American Consumer.

Recently, that trek takes him to Costco  (COST) - Get Costco Wholesale Corporation Report, the big-box store titan that’s having a solid year, with a share price up nearly 20% on a year-to-date basis.

That price growth is threatened by rising inflation, which is up 5.4% on a year-to-year basis in the latest government reading. That figure is surely making a dent in consumer sentiment, Heller notes, and Costco is proof of that.

"I thought I was dreaming the other day while at our local Costco," Heller wrote recently. I walked past a freezer full of beef, and was startled by the sign on it. In fact, it made me stop in my tracks. That freezer was full of Wagyu beef, and the sign indicated a price of $99.99/pound. I had to look further, opened the door, and saw individual and multipack steaks selling for $180, $200 and up."

Even among less high-end products, prices are rising. Heller also says that quenching your thirst comes at a higher price these days – especially when it comes from the south of the border.

"A much-coveted case of Mexican Coke, which comes in 12-ounce glass bottles, is made with sugar and not corn syrup, and tastes much better than the corn-syrup version, will now set you back $25.59. A few months back I paid $21.99. Now that price increase, 16.3% to be exact, could be caused by a lot of factors, including increases in input and shipping costs, and supply chain issues. But it still represents inflation, and is unlikely to get better anytime soon."

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Having chicken with that cold bottle of Coke is no picnic either, Heller said.

"That pound of boneless chicken breast at one of our local grocery stores, which has been priced at $1.99 for years, is now $2.09, a 5% increase at that price, I'm sure it a loss-leader for the store. I don't need to mention gas prices, yet wonder what will happen this winter in the Northeast with heating oil and natural gas, especially if it’s an extremely cold one."

Strolling the aisles and seeing price tags for consumer goods rising, Heller points the icy finger of guilt toward the U.S. government and the Federal Reserve.

"The massive amount of stimulus over the past year and a half, easy money policy, and crazy deficit spending point (in my view), points to an extended period of inflation. I think the Fed will act sooner than 2023 to raise rates. Extended inflation above the 2% target remains one of their greatest fears."

Heller says investors can build robust hedges against inflation with gold and silver, which have both fallen in 2021. Another hedge is the venerable 30-year mortgage, where home loans can be had for as little as 2.625%, with stellar credit, and for a house, that’s reasonably priced in a rising housing value sector.

Otherwise, Heller hopes for the best with inflation, because he’s seen the worst.

"Here's hoping that we don't return to the 1970s and early 1980s inflation eras. As a kid in the 70s, it meant shortages. We re-used paper lunch bags, switched to powdered milk for a while, and waited in gas lines. The lines outside the coin/precious metals store were also something to behold, as consumers sold their gold and silver coins to raise cash."

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