Inflation Is Ticking Upwards. Should Costco Wholesale Investors Be Worried?

Key Points

• Costco Wholesale enjoys competitive advantages due to its size, but rising inflation could slow discretionary spending at its stores.

• The stock has been a huge winner, but it's expensive at this point.

• Costco must produce the growth to justify its valuation, or the stock may stumble.

• 10 stocks we like better than Costco Wholesale ›

Inflation has been a significant problem for millions of Americans over the past five years.

Research from The Motley Fool tracked inflation and its impact on the stock market. Historically, the S&P 500 index performs its best when inflation in the U.S. is within a range of 2% to 3%. If inflation is too high, it can cause the Federal Open Market Committee (FOMC) to raise interest rates, much as it did in 2022. And higher rates can weigh on stock valuations.

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Costco Wholesale (NASDAQ: COST) has been a fantastic stock to own. Shares have returned over 200% over just the past five years, easily outperforming the broader market over that time. But recently, inflation has begun ticking higher again, hitting 2.7% as of June. Should Costco investors worry about the stock? Here's what you need to know.

Image source: Getty Images.

How inflation could affect Costco Wholesale

Costco Wholesale is a leading big-box retailer. Shoppers must purchase a membership to shop at the company's warehouse-style stores. Costco generally sells its merchandise at razor-thin margins, making the bulk of its profits on membership fees.

The company is one of the world's largest retailers, so it can source goods more cheaply than its smaller competitors and sell at lower prices. Inflation raises costs for everyone, like a tide raising every boat. Therefore, inflation isn't necessarily a bad thing for a pricing leader like Costco. Additionally, a company selling bulk quantities can attract consumers looking for a deal.

However, too much inflation can hurt the business.

Costco also sells a lot of discretionary items, things people are less likely to buy when money is tight. Its stores are known to attract shoppers with higher incomes, but that doesn't make the company immune to a recession. If inflation runs hot enough that high earners feel the financial strain, it could stunt sales of non-grocery or household merchandise.

At the moment, Costco seems to be doing just fine. The company's July 2025 sales checked in at $20.89 billion, an 8.5% jump from last year.

The stock's epic run has lifted its valuation

There's little doubt that Costco Wholesale is a world-class business with a loyal following that's rare for a retailer. People flock to Costco for deals, and even to grab a $1.50 hot dog, a novelty it's become famous for. The company doesn't even spend money on sales or marketing -- its remarkable success is all organic and via word of mouth.

That said, the stock's epic run these past five years has inflated its valuation. Costco's price-to-earnings (P/E) ratio has stretched from about 40 five years ago to 55 today:

COST PE Ratio data by YCharts

A high P/E ratio alone doesn't make a stock expensive if the company can grow fast enough to justify it. But analysts estimate Costco, a large and mature company, will increase earnings at an annualized pace of 9% over the next three to five years. That gives it a PEG ratio of about 6.0, signaling that the stock is very expensive for the growth you're likely to see.

Should investors worry?

Nobody can predict short-term stock prices, or when a stock headed in one direction might turn and go in the other. Instead, I like to weigh the potential upside versus the possible downside.

In Costco's case, it seems the stock, which has traded at an average P/E ratio over the past decade of 37.5, is more likely to revert toward its long-term norms than to continue into the stratosphere. If inflation continues to rise, it could start to squeeze discretionary spending enough to slow Costco's business. That may happen anyway if the economy slips into a recession.

A decade from now, Costco will probably still be a fantastic business. However, it's fair to worry about the stock's short-term prospects at its current valuation, and against an increasingly uncertain economic backdrop.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.