Inflation has become a topic of great interest in credit markets and amongst our team in recent weeks. The general narrative around inflation has been sustained price increases driven by shortages in commodities, labor, and freight. Market participants have argued as to whether this is a phenomenon which will ease shortly, or is instead more representative of a problematic inflationary cycle. While macroeconomics is not our core focus or expertise, we think there are some interesting insights from the companies and industries we’ve been studying that could be relevant here.

In particular, we’ve been intrigued by a variety of indications around the tremendous amount of capital expenditures which will need to be spent to transition to a “green” infrastructure. Estimates vary widely, but we’ve seen them trend around $50 – $100+ trillion[1] [2] [3] of incremental capital expenditures needed to achieve global “Net Zero” targets. Importantly, this demand is driven by a societal shift in priorities, and thus we believe it’s likely to come to fruition largely irrespective of economic factors. While efficiencies stand a strong chance of lowering this total over time, it is still a staggering sum. Beyond the sheer eye-popping scale of these numbers, we think there’s a subtle read-through that’s important for the discussion around inflation.

Much of this spend will need to come in the form of investments into productive capacity for commodities – it will be spent on the base metals and materials that are the building blocks of renewable energy, energy storage, and other pathways to Net Zero. These are supply chains that are not easy to increase capacity in, and many of them have been under-invested in for some time now. Typically, the only means of incentivizing increased supply in these areas is increased commodity prices for a sustainable period of time. These increased commodity prices in turn feed into all other areas of the economy, which directly increases prices for many basic consumer needs such as homebuilding, auto production, transportation, and other key areas. When combined with the well documented risk of volatile fossil fuel prices from underinvestment on the path to Net Zero, this could create tremendous inflationary pressure which directly affects consumers around the globe and threatens central banks’ mandate of price stability in developed and developing markets.

[1] Goldman Sachs, Carbonomics: Introducing the GS net zero carbon models and sector frameworks (June 23, 2021) page 4    [2] Bloomberg, Greening Energy to Fight Climate Threat May Cost $92 Trillion (July 21, 2021);    [3] Bloomberg Green, There’s a Fortune to Be Made in the Obscure Metals Behind Clean Power (September 21,2021);
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