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The Bid is BlackRock’s investment podcast where investment professionals break down what’s happening in the world of investing and explores the forces changing the economy and finance. From stock market outlooks to geopolitics and technology, BlackRock speaks to thought leaders and industry experts from about biggest trends moving markets.

Inflation and Investing: What Sticky Prices Mean for Portfolios Today

Inflation is back in focus as AI demand, fiscal spending, energy pressures, and supply constraints reshape markets. Helen Jewell and Tom Becker join The Bid to unpack what sticky inflation means across regions, sectors, equities, fixed income, and multi-asset portfolios.

265. Inflation and Investing: What Sticky Prices Mean for Portfolios Today - Ask Me Anything

Episode Description

Inflation and investing are once again front and center as markets assess a new mix of price pressures. In this Ask Me Anything episode of The Bid, host Oscar Pulido is joined by Helen Jewell, BlackRock’s International Chief Investment Officer for Fundamental Equities, and Tom Becker, senior portfolio manager on BlackRock’s Global Tactical Asset Allocation team.

Together, they explore what is driving inflation today, from AI infrastructure demand and energy bottlenecks to fiscal spending, supply constraints, and regional differences. The conversation examines how inflation is affecting capital markets, equities, fixed income, stock market trends, and portfolio diversification.

This episode also looks at the role of AI as both a near-term inflationary force and a potential longer-term productivity driver. As AI investing accelerates demand for electricity, chips, copper, data centers, and infrastructure, investors are watching how these megaforces reshape markets and the global economy.

Key insights:

How AI infrastructure demand is contributing to inflation pressures

Why inflation differs across regions, including the U.S., Europe, Japan, and China

Where pricing power matters most for companies and sectors

How inflation measures like CPI, PCE, and PPI inform market views

Why sticky inflation can challenge traditional stock-bond diversification

How investors can think about inflation across equities, bonds, and multi-asset portfolios

Sources: Harry Styles Ticket Prices Spark Outrage Among Fans, Forbes, 2026; BlackRock Fundamental Equities, June 2026, based on analysis of company statements; Blackrock Fundamental Equities, June 2026, based on data from the UK Office of National Statistics

Keywords: Inflation and investing, sticky inflation, AI infrastructure, fixed income, equities, portfolio diversification, capital markets, stock market trends

Written Disclosures In Episode Description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to any company or investment strategy mentioned is for illustrative purposes only and not investment advice. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures.

<<TRANSCRIPT>>

Oscar Pulido: Inflation has been one of the defining themes of this decade for investors.

Tom Becker: if we roll the clock back a little bit to the pandemic and the initial reemergence of inflation, back in twenty twenty-one inflation wasn't on anyone's radar.

Oscar Pulido: From the post-pandemic supply shock to the debate over whether price pressures would be transitory, it's a topic that shaped policy, moved markets, and hit consumers directly. But just as many assumed the worst was behind us, inflation is back in the headlines, and the forces driving it look different this time.

Helen Jewell: AI has created a significant demand for energy, for materials, for infrastructure. you've got supply constraints because of what we're seeing in the Middle East, which has pushed up not just oil prices, but also many of the commodity prices which have become more scarce.

Oscar Pulido: It's no longer just about supply chain disruptions, today it's a mix of surging demand, driven in part by the massive build-out of AI infrastructure, fiscal spending by governments on both sides of the Atlantic, and persistent supply constraints in areas like energy. And critically, these dynamics are playing out differently depending on where you are in the world. So what do investors actually need to know, and how should inflation be shaping the way they think about their portfolios?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. Today, we're bringing you a special Ask Me Anything episode focused entirely on inflation.

These questions have been fielded recently by portfolio managers across BlackRock. To help me answer them, I'm joined by Helen Jewell, BlackRock's International Chief Investment Officer for Fundamental Equities, and Tom Becker, a senior portfolio manager on BlackRock's Global Tactical Asset Allocation team.

We'll discuss what's driving inflation today, how it's showing up across regions and sectors, what it means for equities and fixed income, and why understanding inflation could be one of the most important things investors do for their portfolios right now. Helen and Tom, thank you so much for joining us on The Bid

Helen Jewell: It's an honor to be here.

Tom Becker: Oscar, great to be here. Good to see you

Oscar Pulido: Well, Helen, you're in London. I'm sitting in New York, and Tom, you are in San Francisco. So, I think this is a first for The Bid where we are crossing many different time zones to bring together, two of our guests. And despite the fact that you are both a great distance from each other, we're actually going to talk about a topic that has, I think, global relevance, which is the topic of inflation, something that has been a topic for several years.

It seems to be reappearing in terms of its importance. And this is an opportunity, of one of our Ask Me Anything episodes where we get to hear from our listeners and talk to two experts, in different regions with different perspectives. Helen, perhaps I can start with you. As the international CIO for fundamental equities at BlackRock, maybe you can give us an overview of what's been driving inflation this year.

Helen Jewell: Yeah, it's a great question, Oscar, and as I always like to bring it back to basics. And inflation is really just a measure of supply and demand for money and goods.

If there is supply constraints, inflation increases, and if there's increased demand, inflation increases. And, I did notice that last time Tom was on The Bid talking about inflation, it was during the Eras Tour for Taylor Swift.

And, but I'm going to pivot away from American girls and talk about it in the context of a British boy, Harry Styles. He's just kicked off here in London his Together Tour. And because quite sadly there's only one Harry, but there's a lot of demand for him, . And that supply-demand dynamic is also what we're seeing in the global economy.

On the demand side, AI has created a significant demand for energy, for materials, for infrastructure. the numbers for AI spend is staggering. , and the growth in global electricity demand from AI, as well as things like air conditioning, is equivalent to adding a Japan every year. So big demand.

And then of course, on the supply side, you've got supply constraints because of what we're seeing in the Middle East, which has pushed up not just oil prices, but also many of the commodity prices which have become more scarce. It's a real sign of the times, and .

So on the one hand, you've got increased demand, and on the other hand, you've got a supply shock. And as a result of that, inflation rates, which had been heading from the post-COVID highs down to the target rate of 2%, have been heading back up again, which has started to cause real concern for the markets

Oscar Pulido: Tom, it's clear Helen's done a little bit of research. The last time we talked about this topic, you had your fair share of musical references, and, Helen has talked about some of the current events, going on right now. But I think when we first talked about this topic, Tom, it was the post-pandemic shock.

We were coming out of the COVID pandemic, and there was a big pickup in demand, and the world economy was reopening. So to some extent, it was obvious that inflation would pick up. But how has the conversation shifted from that period to where we are now?

Tom Becker: Sure. I think the same dynamics that Helen just mentioned, supply and demand not being in balance, those are still the case today. if we roll the clock back a little bit to the pandemic and the initial kind of reemergence of inflation, back in twenty twenty-one inflation wasn't on anyone's radar.

Oscar, you and I talked about having an inflation piece, and you said there's no bid for this. we're worried about the pandemic, we're worried about lockdowns. No one's interested in inflation, and it's low. you've then had multiple bouts of inflation. you had the reopening, the YOLO, FOMO, dynamics that occurred there. You've had a lot of services inflation, these sticky prices and services, things like insurance, utilities. And then this year it, it's really been about the confluence of the AI demand, strong consumers, and strong government spending as well.

Let's not forget Uncle Sam in the US is, spending historically large amounts of money. we've characterized this as a guns and butter two point o type of dynamic, so you've got fiscal spending back, in the front seat. And so a little event in a small strait of water, in the Middle East, and, a supply constraint there can really tip the apple cart over. I'm not going to respond with Harry Styles, but I think given the timing, you've got memes like Knick-flation. Courtside tickets at the Garden last night for that epic game were historically high. And so if you just look at how consumers are talking about inflation, how society's talking about inflation, it's just unlike anything that was around ten years ago. And I think that's the real concern for policymakers and for markets, which is inflation is front and center in people's discourse. It's front and center in the decision-making of consumers and corporations. That means inflation expectations aren't really well-anchored.

Oscar Pulido: And you're right to point out back in 2021 when we discussed inflation, I did think that you were raising an issue that maybe was not that important, but it just goes to show why you are a portfolio manager and thinking about different asset classes in portfolios. and let's go there actually.

You have a global perspective on the world from the seat that you sit in, and I mentioned at the beginning that I think this is a topic that has global relevance, but perhaps you could elaborate a little bit more. Are there differences in how, investors, people are experiencing inflation in different regions or different countries?

Tom Becker: Completely. So, our global macro perspective really has us hone in on the regional elements of inflation. And like you say, typically inflation is not that much of a global event. it tends to be more local, more regional. you've had the sizes of some of these geopolitical shocks in the global economy over the last five years drive a few global bouts of inflation, but typically it's quite local.

So, China, for example, hasn't had any of these problems that we're talking about. So, from a Western democratic lens, we're talking about these bouts of inflation and reopening. They've been sitting in a very low inflation environment for multiple years, and that's because they have a relatively closed economy, in terms of what their consumers buy and sell, and they've got an overhang from a housing market that, that kind of is deflating. the US versus Europe dynamic, similar, where the Ukraine invasion, the natural gas shock, drove, epic inflation in a number of European countries, but the US had an oversupply of natural gas and a lot of those resources and didn't feel that as acutely. And so, I think when we look at the fixed income instruments that we want to invest in across different regions, we're really attuned to that local inflation. And when we look across the West, US, Japan, Europe, all three have sticky and persistent inflation problems, but like you mentioned, they are pretty idiosyncratic for the most part, but they are persistent.

Oscar Pulido: So, ultimately, there are differences in how different regions are experiencing inflation. Perhaps the regions where both of you sit, though, have that commonality of sticky inflation.

Helen, let's go from a macro perspective to more of a micro perspective. When you look at company by company or you look at individual sectors, w- what are the common characteristics of companies or sectors that are well-placed or not well-placed to deal with this sort of backdrop?

Helen Jewell: Let me just start off by saying that inflation isn't always bad for equities. Earnings, of course, are shown in nominal terms. If inflation is too low, less than about 1%, it isn't good for equities 'cause it's likely that it's because growth and demand are too low. If, on the other hand, inflation is too high, more than around 5%, that's when you start to get the real concern because the discount rate rises and valuations start to fall.

But there's a golden spot between that where you get healthy nominal earnings. But in terms of differentiation, to answer your question on that, there's really three groups. The first group is that you've got these companies that do well. They've either got a commodity that is very staple, so for example, energy, general commodities, that just pass those costs on. And then you've got the other companies that have some form of pricing power.

Now, interestingly, in that second group, there are fewer than as it was historically because normally we've seen, for example, luxury goods companies in that category. But what those companies did is that during the pandemic, they actually shifted their price upwards already. So, from an average sales price perspective, they've already almost used up a lot of that pricing power, and actually what you're seeing is that sales are falling, and they're not able to actually put through those price increases.

The second group, so those that can't put on the price increases at all, have no pricing power, is those companies such as food companies that consume quite a lot, but actually have very little pricing power.

And in the UK, you've seen a real increase in a lot of those input prices. there's been, for example, a thirty percent increase in the price of watermelon. Sugar is up around fifty percent, coffee around forty percent. And these companies on top of that are seeing energy and labor costs increasing. It's a really challenging spot for those companies.

And it's worth remembering that consumers feel inflation very differently to economists. You might look at a three percent number and think, that doesn't seem much. But it comes on the back of multiple years of inflation. Since, five years ago, when Tom first wanted to talk about inflation on The Bid, , and consumers often anchor to when things feel more reasonable and respond badly when that feels out of kilter.

So, general consumer companies are particularly exposed at the moment to inflationary pressure. So, you've got the commodity companies that it's okay, they just pass through. But those companies that are really feeling quite sticky positioning at the moment. And then you've got the final group, the third group, where it's more the second order, which really impacts them, namely interest rate shifts. And of course, that's where the banks come in.

Banks benefit from higher interest rates, which may, of course, be then used to keep inflation under control. but on the other side of that, you've got house builders who generally get hurt when interest rates move up. The most important thing of all is this point on pricing power.

That is where the real differentiation is. But it can be a fine line for companies to really navigate. which sectors can pass on the costs and how. PlayStation costs go up, but actually what we've seen is, the demand for that going down. Which companies within the sectors are the strongest and therefore able to deal with those higher prices.

Some luxury good companies are better than others. And which companies just sell products that are in such high demand, for example, memory at the moment, they can just keep driving those prices up. So that is the key thing. But thinking about those three categories, the pass-throughs, the stickiness, and the second order beneficiaries through interest rates is the best way to think about it from a micro perspective.

Oscar Pulido: And you mentioned at the outset that inflation isn't necessarily bad for equities. In fact, to some extent it reflects a strength in an economy, that there's demand. What you've pointed out is that you then have to go a level deeper and think about it a little bit more specifically by sector and by company.

Tom, when we talk about inflation, I think, investors will hear a lot of terms. They'll hear CPI, they'll hear core CPI, they might even hear a term called PCE. there's a lot of different ways to, to measure inflation. Which are the ones that actually matter?

Tom Becker: Yeah, Oscar, it's quite an alphabet soup when you think of all those acronyms. I think Helen made a good point, which is different types of price rises matter for different parts of the economy. it often feels like your inflation, your lived inflation, is higher than any of those, specific measures that policymakers or kind of the news might be picking up on, and that's because your consumption basket is different than the basket that they're using to measure those things.

In terms of how we think about it, we use inflation, the consumer price inflation, the PCE, which is, a Fed-relevant version of the consumer price inflation. We use those to really think about what is the real purchasing power of fixed income instruments around the world, which central banks are going to be more hawkish, more dovish.

That's in the target variable for those, central banks. We do think about things like PPIs, which came out today and were quite hot as well. That gets a little bit to Helen's point, which is those producer price indices, those are going to be, constraining margins for equities. So those are input costs that are upstream and are going to be a challenge for companies because they need those goods in order to make the things that they sell to consumers. And so, I think it really matters how you're thinking about using the inflation data or which type of inflation data you use. and I think the other thing to, to note is there are lots of ways to try to get ahead of inflation and to understand the, dynamics of it, and that's what we do as an investment team, is we're trying to really make like-for-like measures, that span different countries, that span all those different acronyms and give us a clean read on where is there excess demand versus supply in, in different parts of the world.

Oscar Pulido: Tom, let me stick with you and let's come back to this topic of AI, which is reshaping the world economy. some people look at AI and it's creating a lot of demand for materials and power and energy, and that has inflationary impact. Some people look at AI as potentially increasing productivity over the long term, and maybe that has a dampening impact on inflation. How should we think about it right now in terms of the macro impact of AI?

Tom Becker: I think you touched on it correctly, which is the near term versus long term. Near term, we see AI in, in the inflation data everywhere. So, we see it in terms of the cost of electricity, the cost of construction, the cost of copper, the cost of chips. those are flow- flowing through to the price of your iPhones, not just the price of the data centers.

The price of electricity is, correlated across, corporations and residential households. And so we're seeing this excess demand from corporations really doing a huge investment binge, that's flowing through into excess demand and higher prices. the kind of higher productivity what's going to happen in a couple years, I think that's really up, it's up for grabs in terms of how that impacts inflation.

So higher productivity, definitely believe that AI is a new tool that individuals and corporations are going to use to be more productive. but you have to think about this in an international sense as well, which is if US companies are the ones that are the most readily adopting this new tool, and more business comes their way because they're able to find ways of, delivering better products that global consumers want more, it needn't be that deflationary for the US. it may be Deflationary for some of the economies that aren't as adept at, integrating AI workflows into their business practices. But I think, the historical lesson we've seen is the US tends to be an economy that is a fast adopter of new technology, companies are willing to shake up how they do business, and that tends to lead to higher pro- higher profit growth, higher productivity, but it needn't be deflationary for the US economy as a whole.

Oscar Pulido: Helen, what about you? How do you see AI impacting inflation? Tom actually started to touch on what it could mean for certain equity markets relative to other parts of the world.

Helen Jewell: Yeah, and I absolutely agree with how he's positioning it. The opportunities are basically all in those bottlenecks. where there just isn't enough of the goods and the products that are essential to AI in the energy sector. The companies that sell those things, they are the ones that can put up prices, which is inflation, and as investors, we want to own some of that.

So, on the infrastructure side, we're seeing a shortage in compute and in memory. And chip makers in Asia and the US remain really interesting for us. In the energy rollout, you've got the upstream commodities like the copper needed for electrification, the gas needed to keep the lights up. It could be midstream infrastructure like pipelines that get the energy from where it's produced to where it needs to get to.

It's also in, for example, the finished products like wind turbines and solar panels that give you that much needed power, and it's also the makers of small but essential parts of the electricity grids: cables, transformers, switchgear. A lot of the industrial companies here in Europe are also very interesting because, again, what they are doing is solving for the bottlenecks that are being created as a result of AI.

And it comes back to this point of just keeping it simple. Where does demand still exceed supply? Because these are the companies that are ultimately going to be able to pass on those rising costs to the end consumer. And from an investing perspective, that's where it's really ready, steady, go.

Oscar Pulido: So, Helen, you've described some of the investment opportunities that are in the equity markets as a result of the bottlenecks that the AI demand is creating. But Tom, maybe we can come back to you as a, as an investor who looks across asset classes. What does this mean for fixed income and for multi-asset portfolios when you think about the inflation backdrop?

Tom Becker: Yeah. Fixed income, it's pretty simple. higher inflation, all else equal, erodes the purchasing pow-power and the value of bonds. So we've been playing duration and bonds from the short side basically since 2021. we've seen the inflation be sticky and persistent. We're going on five-plus years of central banks, missing inflation targets to the high side. You had the ECB, renew its hiking cycle today. The Fed is starting to get priced into the end of the year. So, all of that to us means that nominal bonds, particularly government bonds, are a tricky investment. When you step back and think about the multi-asset dynamic, so think about a 60/40 portfolio where you've got your equities for offense, you’ve got your bonds for ballast or for income, there's a challenge there as well, which is when inflation is missing to the high side, the correlation between those two asset classes tends to be higher.

And so, I think a lot of rules of thumb and kind of investor learned behavior from the last decade is, Hey, I've got these bonds and they protect me when bad stuff happens to my equities. When inflation's above target, that relationship is not as strong and it can actually be an amplifier.

And so in a number of months over the last two years, you've seen some of the worst drawdowns for stocks and bonds happen coincidentally, and that's because markets are worried about the inflation being too hot. They're worried about there being too much demand. The overheat is a concern, or the central bank pulling the punchbowl away is a concern.

And so, that's where those two asset classes share a common driver and we think until inflation really gets under control and shows an ability to stay anywhere close to 2% for a year, we're going to be in this environment of less diversified portfolios

Oscar Pulido: And I think what you're both saying is that despite this backdrop of inflation being a bit more persistent, a bit stickier, what this ultimately means is you just have to adapt your portfolios. Helen, you've talked about what that might mean at the individual company, a sector, maybe regional level.

Tom, you've talked about how it might mean some adaptability in terms of the asset classes that you own more or less of. So, higher inflation doesn't necessarily mean don't invest. It might just mean, adapt how you're investing.

Helen, I was, taking some notes. I don't think it's a coincidence that you referenced both watermelon and sugar as examples of where inflation is, showing up in, the European economy. You mentioned Harry Styles at the very beginning. That was the one mention that I caught. I'm sure there are a lot of others. Tom, you have some good competition from Helen in terms of the musical references, but appreciate you both coming on to talk about a topic that is not always exciting, but certainly very important, and thanks for doing it here on The Bid.

Helen Jewell: Great to be here. Thanks for having me, Oscar.

Tom Becker: Thanks, Oscar. Good to see you, Helen.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, make sure to subscribe for more on all the latest investment trends from the US and around the world.

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to the names of each company mentioned is merely for explaining the investment strategy and should not be construed as investment advice or recommendation. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures

MKTG0626-5582332-EXP0627

265. Inflation and Investing: What Sticky Prices Mean for Portfolios Today - Ask Me Anything

Episode Description

Inflation and investing are once again front and center as markets assess a new mix of price pressures. In this Ask Me Anything episode of The Bid, host Oscar Pulido is joined by Helen Jewell, BlackRock’s International Chief Investment Officer for Fundamental Equities, and Tom Becker, senior portfolio manager on BlackRock’s Global Tactical Asset Allocation team.

Together, they explore what is driving inflation today, from AI infrastructure demand and energy bottlenecks to fiscal spending, supply constraints, and regional differences. The conversation examines how inflation is affecting capital markets, equities, fixed income, stock market trends, and portfolio diversification.

This episode also looks at the role of AI as both a near-term inflationary force and a potential longer-term productivity driver. As AI investing accelerates demand for electricity, chips, copper, data centers, and infrastructure, investors are watching how these megaforces reshape markets and the global economy.

Key insights:

How AI infrastructure demand is contributing to inflation pressures

Why inflation differs across regions, including the U.S., Europe, Japan, and China

Where pricing power matters most for companies and sectors

How inflation measures like CPI, PCE, and PPI inform market views

Why sticky inflation can challenge traditional stock-bond diversification

How investors can think about inflation across equities, bonds, and multi-asset portfolios

Sources: Harry Styles Ticket Prices Spark Outrage Among Fans, Forbes, 2026; BlackRock Fundamental Equities, June 2026, based on analysis of company statements; Blackrock Fundamental Equities, June 2026, based on data from the UK Office of National Statistics

Keywords: Inflation and investing, sticky inflation, AI infrastructure, fixed income, equities, portfolio diversification, capital markets, stock market trends

Written Disclosures In Episode Description:

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to any company or investment strategy mentioned is for illustrative purposes only and not investment advice. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures.

<<TRANSCRIPT>>

Oscar Pulido: Inflation has been one of the defining themes of this decade for investors.

Tom Becker: if we roll the clock back a little bit to the pandemic and the initial reemergence of inflation, back in twenty twenty-one inflation wasn't on anyone's radar.

Oscar Pulido: From the post-pandemic supply shock to the debate over whether price pressures would be transitory, it's a topic that shaped policy, moved markets, and hit consumers directly. But just as many assumed the worst was behind us, inflation is back in the headlines, and the forces driving it look different this time.

Helen Jewell: AI has created a significant demand for energy, for materials, for infrastructure. you've got supply constraints because of what we're seeing in the Middle East, which has pushed up not just oil prices, but also many of the commodity prices which have become more scarce.

Oscar Pulido: It's no longer just about supply chain disruptions, today it's a mix of surging demand, driven in part by the massive build-out of AI infrastructure, fiscal spending by governments on both sides of the Atlantic, and persistent supply constraints in areas like energy. And critically, these dynamics are playing out differently depending on where you are in the world. So what do investors actually need to know, and how should inflation be shaping the way they think about their portfolios?

Welcome to The Bid, where we break down what's happening in the markets and explore the forces changing the economy and finance. I'm Oscar Pulido. Today, we're bringing you a special Ask Me Anything episode focused entirely on inflation.

These questions have been fielded recently by portfolio managers across BlackRock. To help me answer them, I'm joined by Helen Jewell, BlackRock's International Chief Investment Officer for Fundamental Equities, and Tom Becker, a senior portfolio manager on BlackRock's Global Tactical Asset Allocation team.

We'll discuss what's driving inflation today, how it's showing up across regions and sectors, what it means for equities and fixed income, and why understanding inflation could be one of the most important things investors do for their portfolios right now. Helen and Tom, thank you so much for joining us on The Bid

Helen Jewell: It's an honor to be here.

Tom Becker: Oscar, great to be here. Good to see you

Oscar Pulido: Well, Helen, you're in London. I'm sitting in New York, and Tom, you are in San Francisco. So, I think this is a first for The Bid where we are crossing many different time zones to bring together, two of our guests. And despite the fact that you are both a great distance from each other, we're actually going to talk about a topic that has, I think, global relevance, which is the topic of inflation, something that has been a topic for several years.

It seems to be reappearing in terms of its importance. And this is an opportunity, of one of our Ask Me Anything episodes where we get to hear from our listeners and talk to two experts, in different regions with different perspectives. Helen, perhaps I can start with you. As the international CIO for fundamental equities at BlackRock, maybe you can give us an overview of what's been driving inflation this year.

Helen Jewell: Yeah, it's a great question, Oscar, and as I always like to bring it back to basics. And inflation is really just a measure of supply and demand for money and goods.

If there is supply constraints, inflation increases, and if there's increased demand, inflation increases. And, I did notice that last time Tom was on The Bid talking about inflation, it was during the Eras Tour for Taylor Swift.

And, but I'm going to pivot away from American girls and talk about it in the context of a British boy, Harry Styles. He's just kicked off here in London his Together Tour. And because quite sadly there's only one Harry, but there's a lot of demand for him, . And that supply-demand dynamic is also what we're seeing in the global economy.

On the demand side, AI has created a significant demand for energy, for materials, for infrastructure. the numbers for AI spend is staggering. , and the growth in global electricity demand from AI, as well as things like air conditioning, is equivalent to adding a Japan every year. So big demand.

And then of course, on the supply side, you've got supply constraints because of what we're seeing in the Middle East, which has pushed up not just oil prices, but also many of the commodity prices which have become more scarce. It's a real sign of the times, and .

So on the one hand, you've got increased demand, and on the other hand, you've got a supply shock. And as a result of that, inflation rates, which had been heading from the post-COVID highs down to the target rate of 2%, have been heading back up again, which has started to cause real concern for the markets

Oscar Pulido: Tom, it's clear Helen's done a little bit of research. The last time we talked about this topic, you had your fair share of musical references, and, Helen has talked about some of the current events, going on right now. But I think when we first talked about this topic, Tom, it was the post-pandemic shock.

We were coming out of the COVID pandemic, and there was a big pickup in demand, and the world economy was reopening. So to some extent, it was obvious that inflation would pick up. But how has the conversation shifted from that period to where we are now?

Tom Becker: Sure. I think the same dynamics that Helen just mentioned, supply and demand not being in balance, those are still the case today. if we roll the clock back a little bit to the pandemic and the initial kind of reemergence of inflation, back in twenty twenty-one inflation wasn't on anyone's radar.

Oscar, you and I talked about having an inflation piece, and you said there's no bid for this. we're worried about the pandemic, we're worried about lockdowns. No one's interested in inflation, and it's low. you've then had multiple bouts of inflation. you had the reopening, the YOLO, FOMO, dynamics that occurred there. You've had a lot of services inflation, these sticky prices and services, things like insurance, utilities. And then this year it, it's really been about the confluence of the AI demand, strong consumers, and strong government spending as well.

Let's not forget Uncle Sam in the US is, spending historically large amounts of money. we've characterized this as a guns and butter two point o type of dynamic, so you've got fiscal spending back, in the front seat. And so a little event in a small strait of water, in the Middle East, and, a supply constraint there can really tip the apple cart over. I'm not going to respond with Harry Styles, but I think given the timing, you've got memes like Knick-flation. Courtside tickets at the Garden last night for that epic game were historically high. And so if you just look at how consumers are talking about inflation, how society's talking about inflation, it's just unlike anything that was around ten years ago. And I think that's the real concern for policymakers and for markets, which is inflation is front and center in people's discourse. It's front and center in the decision-making of consumers and corporations. That means inflation expectations aren't really well-anchored.

Oscar Pulido: And you're right to point out back in 2021 when we discussed inflation, I did think that you were raising an issue that maybe was not that important, but it just goes to show why you are a portfolio manager and thinking about different asset classes in portfolios. and let's go there actually.

You have a global perspective on the world from the seat that you sit in, and I mentioned at the beginning that I think this is a topic that has global relevance, but perhaps you could elaborate a little bit more. Are there differences in how, investors, people are experiencing inflation in different regions or different countries?

Tom Becker: Completely. So, our global macro perspective really has us hone in on the regional elements of inflation. And like you say, typically inflation is not that much of a global event. it tends to be more local, more regional. you've had the sizes of some of these geopolitical shocks in the global economy over the last five years drive a few global bouts of inflation, but typically it's quite local.

So, China, for example, hasn't had any of these problems that we're talking about. So, from a Western democratic lens, we're talking about these bouts of inflation and reopening. They've been sitting in a very low inflation environment for multiple years, and that's because they have a relatively closed economy, in terms of what their consumers buy and sell, and they've got an overhang from a housing market that, that kind of is deflating. the US versus Europe dynamic, similar, where the Ukraine invasion, the natural gas shock, drove, epic inflation in a number of European countries, but the US had an oversupply of natural gas and a lot of those resources and didn't feel that as acutely. And so, I think when we look at the fixed income instruments that we want to invest in across different regions, we're really attuned to that local inflation. And when we look across the West, US, Japan, Europe, all three have sticky and persistent inflation problems, but like you mentioned, they are pretty idiosyncratic for the most part, but they are persistent.

Oscar Pulido: So, ultimately, there are differences in how different regions are experiencing inflation. Perhaps the regions where both of you sit, though, have that commonality of sticky inflation.

Helen, let's go from a macro perspective to more of a micro perspective. When you look at company by company or you look at individual sectors, w- what are the common characteristics of companies or sectors that are well-placed or not well-placed to deal with this sort of backdrop?

Helen Jewell: Let me just start off by saying that inflation isn't always bad for equities. Earnings, of course, are shown in nominal terms. If inflation is too low, less than about 1%, it isn't good for equities 'cause it's likely that it's because growth and demand are too low. If, on the other hand, inflation is too high, more than around 5%, that's when you start to get the real concern because the discount rate rises and valuations start to fall.

But there's a golden spot between that where you get healthy nominal earnings. But in terms of differentiation, to answer your question on that, there's really three groups. The first group is that you've got these companies that do well. They've either got a commodity that is very staple, so for example, energy, general commodities, that just pass those costs on. And then you've got the other companies that have some form of pricing power.

Now, interestingly, in that second group, there are fewer than as it was historically because normally we've seen, for example, luxury goods companies in that category. But what those companies did is that during the pandemic, they actually shifted their price upwards already. So, from an average sales price perspective, they've already almost used up a lot of that pricing power, and actually what you're seeing is that sales are falling, and they're not able to actually put through those price increases.

The second group, so those that can't put on the price increases at all, have no pricing power, is those companies such as food companies that consume quite a lot, but actually have very little pricing power.

And in the UK, you've seen a real increase in a lot of those input prices. there's been, for example, a thirty percent increase in the price of watermelon. Sugar is up around fifty percent, coffee around forty percent. And these companies on top of that are seeing energy and labor costs increasing. It's a really challenging spot for those companies.

And it's worth remembering that consumers feel inflation very differently to economists. You might look at a three percent number and think, that doesn't seem much. But it comes on the back of multiple years of inflation. Since, five years ago, when Tom first wanted to talk about inflation on The Bid, , and consumers often anchor to when things feel more reasonable and respond badly when that feels out of kilter.

So, general consumer companies are particularly exposed at the moment to inflationary pressure. So, you've got the commodity companies that it's okay, they just pass through. But those companies that are really feeling quite sticky positioning at the moment. And then you've got the final group, the third group, where it's more the second order, which really impacts them, namely interest rate shifts. And of course, that's where the banks come in.

Banks benefit from higher interest rates, which may, of course, be then used to keep inflation under control. but on the other side of that, you've got house builders who generally get hurt when interest rates move up. The most important thing of all is this point on pricing power.

That is where the real differentiation is. But it can be a fine line for companies to really navigate. which sectors can pass on the costs and how. PlayStation costs go up, but actually what we've seen is, the demand for that going down. Which companies within the sectors are the strongest and therefore able to deal with those higher prices.

Some luxury good companies are better than others. And which companies just sell products that are in such high demand, for example, memory at the moment, they can just keep driving those prices up. So that is the key thing. But thinking about those three categories, the pass-throughs, the stickiness, and the second order beneficiaries through interest rates is the best way to think about it from a micro perspective.

Oscar Pulido: And you mentioned at the outset that inflation isn't necessarily bad for equities. In fact, to some extent it reflects a strength in an economy, that there's demand. What you've pointed out is that you then have to go a level deeper and think about it a little bit more specifically by sector and by company.

Tom, when we talk about inflation, I think, investors will hear a lot of terms. They'll hear CPI, they'll hear core CPI, they might even hear a term called PCE. there's a lot of different ways to, to measure inflation. Which are the ones that actually matter?

Tom Becker: Yeah, Oscar, it's quite an alphabet soup when you think of all those acronyms. I think Helen made a good point, which is different types of price rises matter for different parts of the economy. it often feels like your inflation, your lived inflation, is higher than any of those, specific measures that policymakers or kind of the news might be picking up on, and that's because your consumption basket is different than the basket that they're using to measure those things.

In terms of how we think about it, we use inflation, the consumer price inflation, the PCE, which is, a Fed-relevant version of the consumer price inflation. We use those to really think about what is the real purchasing power of fixed income instruments around the world, which central banks are going to be more hawkish, more dovish.

That's in the target variable for those, central banks. We do think about things like PPIs, which came out today and were quite hot as well. That gets a little bit to Helen's point, which is those producer price indices, those are going to be, constraining margins for equities. So those are input costs that are upstream and are going to be a challenge for companies because they need those goods in order to make the things that they sell to consumers. And so, I think it really matters how you're thinking about using the inflation data or which type of inflation data you use. and I think the other thing to, to note is there are lots of ways to try to get ahead of inflation and to understand the, dynamics of it, and that's what we do as an investment team, is we're trying to really make like-for-like measures, that span different countries, that span all those different acronyms and give us a clean read on where is there excess demand versus supply in, in different parts of the world.

Oscar Pulido: Tom, let me stick with you and let's come back to this topic of AI, which is reshaping the world economy. some people look at AI and it's creating a lot of demand for materials and power and energy, and that has inflationary impact. Some people look at AI as potentially increasing productivity over the long term, and maybe that has a dampening impact on inflation. How should we think about it right now in terms of the macro impact of AI?

Tom Becker: I think you touched on it correctly, which is the near term versus long term. Near term, we see AI in, in the inflation data everywhere. So, we see it in terms of the cost of electricity, the cost of construction, the cost of copper, the cost of chips. those are flow- flowing through to the price of your iPhones, not just the price of the data centers.

The price of electricity is, correlated across, corporations and residential households. And so we're seeing this excess demand from corporations really doing a huge investment binge, that's flowing through into excess demand and higher prices. the kind of higher productivity what's going to happen in a couple years, I think that's really up, it's up for grabs in terms of how that impacts inflation.

So higher productivity, definitely believe that AI is a new tool that individuals and corporations are going to use to be more productive. but you have to think about this in an international sense as well, which is if US companies are the ones that are the most readily adopting this new tool, and more business comes their way because they're able to find ways of, delivering better products that global consumers want more, it needn't be that deflationary for the US. it may be Deflationary for some of the economies that aren't as adept at, integrating AI workflows into their business practices. But I think, the historical lesson we've seen is the US tends to be an economy that is a fast adopter of new technology, companies are willing to shake up how they do business, and that tends to lead to higher pro- higher profit growth, higher productivity, but it needn't be deflationary for the US economy as a whole.

Oscar Pulido: Helen, what about you? How do you see AI impacting inflation? Tom actually started to touch on what it could mean for certain equity markets relative to other parts of the world.

Helen Jewell: Yeah, and I absolutely agree with how he's positioning it. The opportunities are basically all in those bottlenecks. where there just isn't enough of the goods and the products that are essential to AI in the energy sector. The companies that sell those things, they are the ones that can put up prices, which is inflation, and as investors, we want to own some of that.

So, on the infrastructure side, we're seeing a shortage in compute and in memory. And chip makers in Asia and the US remain really interesting for us. In the energy rollout, you've got the upstream commodities like the copper needed for electrification, the gas needed to keep the lights up. It could be midstream infrastructure like pipelines that get the energy from where it's produced to where it needs to get to.

It's also in, for example, the finished products like wind turbines and solar panels that give you that much needed power, and it's also the makers of small but essential parts of the electricity grids: cables, transformers, switchgear. A lot of the industrial companies here in Europe are also very interesting because, again, what they are doing is solving for the bottlenecks that are being created as a result of AI.

And it comes back to this point of just keeping it simple. Where does demand still exceed supply? Because these are the companies that are ultimately going to be able to pass on those rising costs to the end consumer. And from an investing perspective, that's where it's really ready, steady, go.

Oscar Pulido: So, Helen, you've described some of the investment opportunities that are in the equity markets as a result of the bottlenecks that the AI demand is creating. But Tom, maybe we can come back to you as a, as an investor who looks across asset classes. What does this mean for fixed income and for multi-asset portfolios when you think about the inflation backdrop?

Tom Becker: Yeah. Fixed income, it's pretty simple. higher inflation, all else equal, erodes the purchasing pow-power and the value of bonds. So we've been playing duration and bonds from the short side basically since 2021. we've seen the inflation be sticky and persistent. We're going on five-plus years of central banks, missing inflation targets to the high side. You had the ECB, renew its hiking cycle today. The Fed is starting to get priced into the end of the year. So, all of that to us means that nominal bonds, particularly government bonds, are a tricky investment. When you step back and think about the multi-asset dynamic, so think about a 60/40 portfolio where you've got your equities for offense, you’ve got your bonds for ballast or for income, there's a challenge there as well, which is when inflation is missing to the high side, the correlation between those two asset classes tends to be higher.

And so, I think a lot of rules of thumb and kind of investor learned behavior from the last decade is, Hey, I've got these bonds and they protect me when bad stuff happens to my equities. When inflation's above target, that relationship is not as strong and it can actually be an amplifier.

And so in a number of months over the last two years, you've seen some of the worst drawdowns for stocks and bonds happen coincidentally, and that's because markets are worried about the inflation being too hot. They're worried about there being too much demand. The overheat is a concern, or the central bank pulling the punchbowl away is a concern.

And so, that's where those two asset classes share a common driver and we think until inflation really gets under control and shows an ability to stay anywhere close to 2% for a year, we're going to be in this environment of less diversified portfolios

Oscar Pulido: And I think what you're both saying is that despite this backdrop of inflation being a bit more persistent, a bit stickier, what this ultimately means is you just have to adapt your portfolios. Helen, you've talked about what that might mean at the individual company, a sector, maybe regional level.

Tom, you've talked about how it might mean some adaptability in terms of the asset classes that you own more or less of. So, higher inflation doesn't necessarily mean don't invest. It might just mean, adapt how you're investing.

Helen, I was, taking some notes. I don't think it's a coincidence that you referenced both watermelon and sugar as examples of where inflation is, showing up in, the European economy. You mentioned Harry Styles at the very beginning. That was the one mention that I caught. I'm sure there are a lot of others. Tom, you have some good competition from Helen in terms of the musical references, but appreciate you both coming on to talk about a topic that is not always exciting, but certainly very important, and thanks for doing it here on The Bid.

Helen Jewell: Great to be here. Thanks for having me, Oscar.

Tom Becker: Thanks, Oscar. Good to see you, Helen.

Oscar Pulido: Thanks for listening to this episode of The Bid. If you've enjoyed this episode, make sure to subscribe for more on all the latest investment trends from the US and around the world.

<<SPOKEN DISCLOSURES>>

This content is for informational purposes only and is not an offer or a solicitation. Reliance upon information in this material is at the sole discretion of the listener. Reference to the names of each company mentioned is merely for explaining the investment strategy and should not be construed as investment advice or recommendation. For full disclosures, visit blackrock.com/corporate/compliance/bid-disclosures

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Who hosts The Bid investment podcast?

Oscar Pulido

Oscar Pulido

Global Head of Product Strategy for Fundamental Equities
Oscar D. Pulido, CFA, Managing Director, is the Global Head of Product Strategy for the Fundamental Equities (FE) business. In this role, he is responsible for commercial strategy, product development, and business activities to drive growth across the FE platform. He is also the host of BlackRock's flagship investment podcast, The Bid.

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About The Bid (FAQs)

  • The Bid breaks down what’s happening in the world of investing and explores the forces shaping the economy and financial markets. From market outlooks to geopolitics and technology, it features insights from BlackRock experts and global thought leaders on the trends moving markets.

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