Inflation Is Very Real, Just Ask Costco Shoppers

I thought I was dreaming the other day while at our local Costco (COST) .

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.

I later confirmed on Costco's website that they do indeed sell wagyu, it was not a dream. Want a six-pound A5 grade Japanese Tenderloin Wagyu Roast? That will set you back $999.99. Interestingly, it comes with a certificate of authenticity.

Costco has gone upscale, and I wonder if consumers are actually paying that much for a steak? Furthermore, I wonder if it's worth the price. Can't say I'll find out anytime soon.

Another takeaway from a Costco excursion, and you can call me "Captain Obvious," but inflation is becoming very real. 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.

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 its an extremely cold one.

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.

For their part, precious metals have pulled back slightly year-to-date; gold is down 5%, while silver has fallen 19%. However, much of the upside we've seen since the onset of the pandemic remains intact. While the premium for physical silver over the spot price has fallen, it is still fairly hefty. A $1,000 bag of "junk" silver coins will run you about $2,100, representing a 23% premium to the spot price. Back in March of 2020, when the price of silver fell into the mid-$12 range, that premium was 63%. The price of silver has doubled since then, and with uncertainty over the pandemic it has fallen overall (stay tuned). We'll see how both metals react if the inflation picture worsens, and/or is more extended than previously believed.

One of the best inflation hedges available, and not often considered as such, is the 30-year fixed-rate mortgage. You can still lock in a 30-year loan in the 2.625%-2.75% range, a fixed-rate mortgage at that rate on an appreciating asset can be quite powerful. Of course, that does not take into consideration the bubble-like conditions in certain real estate markets, but with rising rates on the horizon, is a no-brainer under the right circumstances.

Here's hoping that we don't return to the 1970's and early 1980's inflation eras. As a kid in the 70's, 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.

(Costco is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells COST? Learn more now.)

At the time of publication, Jonathan Heller was Long PSLV.