QUESTION OF THE WEEK

How will #NetZero affect inflation?

Every other week, we ask for your thoughts on a top question our portfolio managers and strategists are debating. We share the final poll results and insights.

The transition to a #NetZero carbon world will shape many economic outcomes in the years ahead – and was a key part of discussions at the BlackRock Investment Institute’s 2021 Midyear Outlook Forum.

A big question: What will happen to inflation as we transition to a more sustainable world? 

     

    Poll results: What will happen to inflation as we transition to a more sustainable world? 

    Source: Blackrock Investment Institute, with data from SurveyMonkey. Note: Data does not include results from BlackRock social media polls.

    Poll results

    Public responses saw structurally higher (63%), low (22%) or not much (15%) of an effect to inflation from the transition to a more sustainable world.

    Four out of five BlackRock portfolio managers thought the net-zero transition will have a material impact on inflation in the years to come. Investors were divided on whether it will push inflation up or down: just over half expect structurally higher inflation, while nearly a third see inflation staying low. A fifth don’t think it will have any notable impact.

    Split views

    Investors saw heavy government spending, the rising cost of doing business and supply shortages of commodities needed for electrification amid the net-zero transition contributing to structurally higher inflation. Some specific views include:

    • Climate action is likely to touch all sectors of the economy – including agriculture and housing that are hard to decarbonize and constitute a big part of consumer price inflation baskets. 
    • Change doesn't come free: phasing out dirty energy for clean energy, adopting electric vehicles, and reconditioning homes and offices will be expensive and could drive wage and consumer price inflation. 
    • There seems to be an overall mismatch in supply and demand as not just utilities, but also big corporates look to purchase renewable power directly. 
    • Moving to renewables will likely require a multi-trillion-dollar investment across the globe, and we now have a race between the G7 and China to invest in infrastructure across emerging markets.
    • Environmental Social and Governance (ESG) issues are seen by some as more broadly inflationary, at least in the short term, if they spur companies to change operating models. 
    • Since most of our energy supply is still generated from fossil fuels, carbon taxes and other regulations will inevitably result in higher energy prices in the short term. Technology and a switch to renewables will alleviate some of the pressure, but this will take time and money, potentially creating more price pressures.

    On the other hand, several portfolio managers saw low inflation ahead, with technological innovation resulting in a productivity boom that keeps a lid on prices. China could play a pivotal role.  Its plan to reach net-zero emissions by 2060 is built mainly around offsets, moving carbon-intensive investments to green investments. Add new technology to the mix and inflation could be contained in the medium term. 

    Trading the transition

    The BlackRock Investment Institute (BII) sees potential for the green transition to spur a boom in commodities critical for electrification, such as copper and lithium. ESG considerations could make capital harder to come by for traditional energy producers – even as the sector may thrive in the near term amid a resurgence in demand powered by the economic restart. Beyond these dynamics, BII expects structurally higher inflation – hovering around 3% – over the medium term, driven by higher production costs and central banks letting inflation run a little hot.

     

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