On Walmart’s Deflation Call Thursday

In this morning’s earnings call, Walmart CEO McMillion called for “a period of deflation in the months to come,” and the stock is down sharply. But he went on to say that it is “better for our customers” and will lead to “growth in units.” Corporate profitability comes not just from top-line pricing power, but from unit sales. And margins are also driven by cost of goods sold, which falls in a deflation. Walmart is telling our deflation story: after three years of an inflation shock, a little deflation will be relief for consumers and will stimulate a wave of deferred consumption. The consensus is finally conceding that inflation has been conquered. Now it will have to begin to accept the inevitability of deflation. Ultimately, it will have to learn that this deflation will be good. In the meantime, a bonus: deflation fears will bring forward in time the first Fed rate cut, and accelerate the coming easing cycle.