- Sticky inflation risks persist amid tariff pass-through
- Ongoing value-seeking behaviour supports a further shift towards essentials and private labels, favouring Walmart and Costco
- Major retailers continue diversifying sourcing away from China and selectively adjusting prices
- We maintain a preference for leading global retailers with strong grocery exposure
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Inflation remains sticky. US overall inflation edged up to 3.0% y/y in Sep 2025, with urban food and beverage inflation following at similar trend. After tariff escalations in Apr 2025, when US tariffs on China were raised to as high as 125%, a truce followed, leaving only the additional 10% reciprocal tariffs in place until Nov 2026. The US also continues to impose a 10% baseline tariff on all other countries and 25% on selected goods from Canada and Mexico. The market forecasts inflation at 2.8%/2.9% in 2025/26 (Bloomberg), while the Fed projects 3.1%/2.6% for 2025/2026, reflecting wage growth, rent inflation, and tariff pass-through, partly offset by softer oil prices. On 29 Oct 2025, the Fed cut the funds rate by 25 bps to 3.75–4.00%, but concerns over persistent inflation have since lowered expectations for further easing – CME-implied probability of a December rate cut has fallen from 90% in late October to 42% currently. The Trump administration’s pressure for lower rates could, however, increase the risk of entrenched inflation.
Grocery-focused retailers extend outperformance. US retailers with heavier grocery exposure continued to outperform. Walmart delivered another solid quarter in 2Q FY26, with US comparable sales up 4.6% y/y on strong grocery and health & wellness momentum. E-commerce revenue surged 26% y/y, and adjusted EPS grew 1.5% y/y. Costco reported similarly strong 4Q FY25 results, with comparable sales up 5.7% y/y and resilient spending from middle-income households. E-commerce revenue grew 13.6% y/y; net income rose to USD2.61bn (from USD2.35bn). Target lagged due to its higher discretionary mix: comparable sales fell 1.9% y/y, with weakness in home, apparel, and hardlines. Digital comparable sales rose 4.3% y/y on strong same-day fulfilment, but adjusted EPS declined to USD2.05 (from USD2.57) amid softer demand and elevated promotions. Meanwhile, the market expects Walmart and Costco to extend their outperformance, supported by mid- to high-single-digit topline/EPS growth.
Ongoing value-seeking trends. With inflation showing signs of re-acceleration, consumers are likely to continue shifting spending from discretionary categories towards essentials and groceries, favouring Walmart and Costco. Historically, excluding COVID-driven panic buying, Walmart’s and Costco’s comparable sales have shown strong positive correlations with US inflation (0.8 and 0.7, respectively), while Target’s has been slightly negative. In 9M25, food-at-home prices rose 2.3% y/y, vs. 3.7% for food-away-from-home, reinforcing value-seeking behaviour and supporting grocery volumes. Increased adoption of private-label products also enhances loyalty and typically carries better margins for hypermarkets. Although tariff impacts are gradually filtering through, major retailers have continued to diversify sourcing away from China and selectively adjust prices to mitigate cost pressure. We maintain a preference for retailers with stronger grocery exposure, such as Walmart and Costco.
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Related insights
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