Analysis  |  November 8, 2021

Inflation – A Perfect Storm

Capital at risk. The value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the full amount invested.

Deeply interconnected global themes are driving inflationary pressures, it’s not just because of a post-COVID surge in economic activity argues Tatjana Greil-Castro.

For the last 15 years, inflation has barely featured in developed market economies, as central banks fought deflation with low-to-negative interest rates.1 Yet we believe the pandemic-induced global economic shutdown has accelerated several long-term trends which have led to the current supply-side shocks and the consequent return of inflation. We take a brief look at these changing dynamics in turn.

Beyond COVID

Initially, there was a debate about whether inflationary pressures were transitory.2  However, the inflation data appears to show a longer-term, more permanent trend.3 Central banks are therefore positioning themselves to scale back the extraordinary amounts of monetary stimulus used to support economies during the COVID pandemic.4

Supply side shocks, a primary inflationary cause, were initially blamed on COVID and its aftermath as countries pumped in huge amount of fiscal stimulus to kickstart their economies.5 But we believe there is something deeper at work.

Energy Transition

We are seeing signs of an energy transition as the world scales back its reliance on fossil fuels to focus on renewables.

This is already being played out in Europe, as a rapid uptick in energy demand coincides with an adjustment to cleaner energy sources.6 Gas prices have shot up in response, adding fuel to the inflationary fire.7 With winter approaching in the northern hemisphere, it is likely the shortage is being felt even more acutely.

In China, where increasing environmental concerns have played their part in reducing their use of coal,8 a lower domestic coal supply (combined with geopolitical spats such as blocking energy imports from Australia)9 comes at a time when the country is also facing increased energy demand post-COVID as it seeks to boost economic activity.

The global move to renewables requires an enormous amount of transition investment and thus could lead to more persistent inflation as this isn’t a short-term issue – we believe the transition could last well over a decade.

Yet even as we fight the battle against climate change, changes in the weather are making it harder to generate predictable renewable energy, leading to further shortages.10 There is unlikely to be a simple solution to the supply/demand gap.

Effects of Already Observed Climate Change

Alongside increased difficulties in energy generation, climate change is also driving up the cost of food.11 South American crops have suffered this year due to drought and/or flooding.12

The destruction of the Amazon rainforest along with other habitats that act as carbon sinks is resulting in further climate change, which will have impact on crop production and drive prices higher still.


Another trend accelerated by COVID is the increase in deglobalisation.13 The rise in autarkic governmental policies is exacerbating supply bottlenecks and highlighting how stretched interdependent supply chains have become.

Events such as Brexit and the deterioration in US China trade relations is resulting in additional supply chain disruption and consequently inflation.14


Structural changes due to the pandemic are also feeding through into second round inflationary pressures from higher wage demands. We have seen this particularly in the US where there is a reduced workforce at a time of higher demand.15

With the cost of living increasing while wages stagnate, we are likely to see more cases of higher wage demands while employers struggle to attract labour.

Meanwhile many populations are ageing, and retirees are not being replaced.16 We believe the education system has focused on a narrow range of employment options that often leave the less education-focused careers exposed to a lack of new entrants into certain sectors.

Do politicians and central banks have the power to control inflation in the face of so many conflicting pressures? For many years, the European Central Bank struggled to hit its ‘close to’ 2% inflation target, with an average of 0.9 % p.a. since 2013.17

The question is whether those responsible for fiscal and monetary policy have the stomach to risk provoking a possible recession in the face of already rising uncertainties generated by the noted supply side shocks and other global transitionary forces.

This time last year we faced the uncertainties brought about by COVID. This year, and probably beyond, inflation appears to be among the primary topics of debate.

As bond investors, the macroeconomic environment remains a key consideration. We continue to assess valuations and our positions against an uncertain inflationary backdrop that we believe is the result of a powerful convergence of factors that will not easily be controlled by current monetary and fiscal thinking.

1. European Central Bank, as of 26 August 2021.
2. FT, as of 25 October 2021.
3.Trading Economics, as of 30 September 2021.
4. FT, as of 27 September 2021.
5. Vox EU, as of 23 July 2020.
6. Clean Energy Wire, as of 12 October 2021.
7. Euro News, as of 6 October 2021.
8. NPR, as of 22 April 2021.
9. CNBC, as of 2 June 2021.
10. CNBC, as of 29 September 2021.
11. Conservation International, as of 16 August 2021.
12. Washington Post, as of 24 September 2021, Reuters, as of 26 August 2021.
13. Geopolitical Monitor, as of 8 May 2021.
14. New York Times, as of 5 October 2021.
15. Reuters, as of 7 September 2021.
16. World Health Organisation, as of 4 October 2021.
17. The Economist, as of 17 July, 2021.

This material is not intended to be relied upon as a forecast, research, or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed by Muzinich & Co. are as of October 2021 and may change without notice.

Important Information

Muzinich & Co. referenced herein is defined as Muzinich & Co. Limited and its affiliates. This document has been produced for information purposes only and as such the views contained herein are not to be taken as investment advice. Opinions are as of date of publication and are subject to change without reference or notification to you. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments and the income from them may fall as well as rise and is not guaranteed and investors may not get back the full amount invested. Rates of exchange may cause the value of investments to rise or fall. This document and the views and opinions expressed should not be construed as an offer to buy or sell or invitation to engage in any investment activity; they are for information purposes only. Opinions and statements of financial market trends that are based on market conditions constitute our judgement as at the date of this document. They are considered to be accurate at the time of writing, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted. Certain information contained in this document constitutes forward-looking statements; due to various risks and uncertainties, actual events may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained in this document may be relied upon as a guarantee, promise, assurance or a representation as to the future. All information contained herein is believed to be accurate as of the date(s) indicated, is not complete, and is subject to change at any time. Certain information contained herein is based on data obtained from third parties and, although believed to be reliable, has not been independently verified by anyone at or affiliated with Muzinich and Co., its accuracy or completeness cannot be guaranteed. Risk management includes an effort to monitor and manage risk but does not imply low or no risk. Emerging Markets may be more risky than more developed markets for a variety of reasons, including but not limited to, increased political, social and economic instability; heightened pricing volatility and reduced market liquidity. Muzinich & Co., Inc. is a registered investment adviser with the Securities and Exchange Commission (SEC). Muzinich & Co., Inc.’s being a Registered Investment Adviser with the SEC in no way shall imply a certain level of skill or training or any authorization or approval by the SEC. Issued in the European Union by Muzinich & Co. (Dublin) Limited, which is authorized and regulated by the Central Bank of Ireland. Registered in Ireland No. 625717. Registered address: 16 Fitzwilliam Street Upper, Dublin 2, D02Y221, Ireland. Issued in Switzerland by Muzinich & Co. (Switzerland) AG. Registered in Switzerland No. CHE-389.422.108. Registered address: Tödistrasse 5, 8002 Zurich, Switzerland. Issued in Singapore and Hong Kong by Muzinich & Co. (Singapore) Pte. Limited, which is licensed and regulated by the Monetary Authority of Singapore. Registered in Singapore No. 201624477K. Registered address: 6 Battery Road, #26-05, Singapore, 049909. Issued in all other jurisdictions (excluding the U.S.) by Muzinich & Co. Limited. which is authorized and regulated by the Financial Conduct Authority. Registered in England and Wales No. 3852444. Registered address: 8 Hanover Street, London W1S 1YQ, United Kingdom. 2021-07-05-6692