November wholesale prices may have been slightly warmer than expected, but next week’s look at consumer prices is what could solidify the Federal Reserve’s upcoming interest rate decision. Ultimately, we think November’s consumer price index (CPI) carries more weight for the market and the Fed than Friday’s wholesale figure, officially known as the producer price index (PPI). Before you overreact to Friday’s print, also consider what Club holding Costco ( COST ) said about inflation in its quarterly earnings after the closing bell Thursday — it appears to be coming down, albeit slowly, though a few areas as fresh foods remain sticky. “Remember last quarter and fourth quarter, we estimated year-over-year price inflation was about 8%. In the first quarter, we estimate the corresponding 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. “There are a few things, but overall we see a slight trend,” he added. At a headline level, what the retail giant is seeing seems directionally in line with what Friday’s wholesale price report indicated. PPI rose 7.4% year-on-year, slightly warmer than the estimate of a 7.2% jump. However, November’s overall figure is down from the revised 8.1% annual rate recorded in October and 8.5% in September. The 7.4% increase in November is also the slowest annual jump in wholesale prices since May 2021. The annual downward trajectory continued despite increases across several food categories, including fresh and dry vegetables. PPI rose 0.3% month-on-month – slightly above the 0.2% estimate, but the same rate of increase seen in October and September. The 3.3% year-on-year jump in the PPI food index is one of the more worrying data points, representing a big increase from both October’s 0.8% increase 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 that Costco management did not warn of a serious reversal in inflationary trends. To be sure, Galanti reminded investors that it’s a fluid situation, saying “we’ll keep you informed” of the price pressure it’s seeing. But right now the finance director signaled favorable movements in the prices of raw materials such as cornmeal, sugar and butter. Friday’s PPI did not significantly change expectations for what the Fed might do on Wednesday at the end of its two-day policy meeting in December. The market still expects the US Federal Reserve to raise interest rates by half a percentage point, which would represent a slowdown from its aggressive past four decisions. The Fed has raised interest rates by 0.75 percentage points at each of its last 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 rate to between 3.75% and 4% in an effort to curb the hottest US inflation environment seen since the early 1980s. Bottom Line We expect the Fed to go through with a half-percentage-point hike on Wednesday, unless Tuesday’s CPI reading comes in scorching hot and calls 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 seem to be moving in the right direction. (Jim Cramer’s Charitable Trust is long COST. See here for a complete 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 share 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 INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION EXISTS OR IS CREATED BY YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULTS OR DILUTION ARE 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
November wholesale prices may have been slightly warmer than expected, but next week’s look at consumer prices is what could solidify the Federal Reserve’s upcoming interest rate decision.
