Walmart whispered a quiet but significant warning Tuesday that consumer-price inflation could surge if President-elect Donald Trump follows through on his vow to impose tariffs on a host of goods imported into the world's biggest economy.
The world's largest retailer, which posted better-than-expected fiscal-third-quarter earnings and boosted its full-year profit forecast, is taking a bigger share of high-income earners' spending.
These consumers are trading down for lower prices amid the impact of post-pandemic inflation on everything from food to clothing.
Walmart's (WMT) U.S. same-store sales rose 5.3% in the three months ended in October, compared with the year-earlier quarter, notching its strongest quarterly tally in nearly three years.
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Overall sales were up 6.6% to a staggering $169.6 billion, and the group sees full-year revenue rising as much as 5.1%, suggesting an overall total of around $681 billion.
Walmart, however, has been steadfast in keeping overall prices low while improving profit margins through a mix of geographies, efficiencies, and the vast scale of its domestic business.
The group boasts around 4,600 U.S. stores, with locations within 10 miles of around 90% of the U.S. population, enabling it to capture around $9 of every $100 that makes its way into a U.S. retail till.
Image source: Walmart
That's having a significant impact on broader inflation, which is decelerating, albeit slowly and stubbornly, despite a resilient labor market and a broadly robust economy.
Consumer is king
The U.S. economy is unique in that it is the largest in the world and relies heavily on consumer spending to power the bulk of its growth.
That, in turn, leaves it vulnerable to inflation pressure, stoked by either wage growth, which puts more cash in potential spenders' pockets, or price increases, as consumers chase expensive goods.
In its fight to tame those pressures, the Federal Reserve will try to slow wage growth through higher interest rates, which blunt the labor market. At the same time, the Fed hopes that second-round inflation effects will be mitigated, as smaller companies cannot pass on price increases as easily as their larger rivals can.
Walmart, the largest rival in the consumer spending space, has a hammerlock on in-store retail and a growing presence in online sales. It isn't hiking prices, either. As a result, it's winning over price-conscious shoppers across a host of income brackets.
Related: CPI inflation sparks Fed interest rate cut bets
Last month's jobs report, wrecked by the impact of hurricanes Helene and Milton, still showed a healthy headline unemployment rate of 4.1%, with average wages rising 4% from the year-earlier period.
Headline inflation, meanwhile, rose only 2.6%, and more than half the month-on-month increase was tied to housing costs.
Food-price inflation, a key element in the 2024 elections, was up just 0.2% last month. Although the cumulative effects of post-pandemic increases have been significant, they're not showing signs of resurgence.
Walmart, which commands around a 24% share of the U.S. grocery market — more than twice that of its nearest rival, Kroger (KR) — also plays a key role in that.
"We're not raising prices; we're lowering prices. But we don't want product margins to go up," Chief Executive Doug McMillon told investors in August. "When we talk about margin improvement in our company, it's business mix, a mix of geographies. It is not that we are increasing product margins."
Walmart price pledge
Finance chief John David Rainey echoed that message in August and told investors Tuesday that the group had rolled back prices on around 6,000 items over the third quarter, around half of them in the home and grocery category.
But that ability could be hampered by Trump's reported plans to impose tariffs of 60%, the highest he is allowed within the authority of an executive order, on China-made goods and a 10% levy on imports from the rest of the world.
“To me, the most beautiful word in the dictionary is ‘tariffs,'" Trump said during an Economic Club of Chicago interview last month.
Related: October retail sales add further complexity to Fed rate cut bets
"We’re going to bring the companies back. We’re going to lower taxes for companies that are going to make their products in the USA. And we’re going to protect those companies with strong tariffs.”
Glenmede strategist Jason Pride estimates Trump's first-term tariffs blunted U.S. growth by around 0.8%. And he notes that stricter levies are likely to require authority from Congress, where appetite might be scarce given the narrow Republican majority and the boost they could give to consumer prices.
"Some of President-elect Donald Trump’s proposed policies, such as large-scale tariffs, reinforce why we see persistent inflation in the medium term and interest rates staying above prepandemic levels," said BlackRock's Jean Bolvin.
"If implemented, those policies could reinforce geopolitical fragmentation and economic competition," he added.
Walmart's Rainey told CNBC Tuesday that while the group has been "living under a tariff environment for seven years" and sources around two-thirds of goods domestically, it's still worried about tariffs' overall impact.
"What we're seeing right now feels very consistent with prior quarters," he said. "Consumers are spending more on food; they are buying general merchandise items."
"Tariffs, though, are inflationary for customers, so we want to work with suppliers and with our own private assortment to try and bring prices down," he added.
Trump and the Fed need Walmart
A spokesman also told Reuters that the group was concerned that "significantly increased tariffs could lead to increased costs for our customers."
Those warnings should be well heeded by the incoming administration, which won support from voters in large part for its vow to lower inflation and extend the economy's world-leading growth rally.
The Federal Reserve, meanwhile, is alive to the prospects of tariff-stoked inflation pressures and is backing off from its prior messaging, with Chairman Jerome Powell telling investors the central bank is in "no hurry" to cut interest rates.
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Walmart's role in keeping prices low while allowing consumer spending to continue boosting growth prospects in the world's biggest economy is critical.
Neither the new Trump administration nor the Fed can afford to see that change.
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