Persistent inflation FOR PUBLIC DISTRIBUTION IN THE U.S., CANADA, LATIN AMERICA, HONGKONG, SINGAPORE AND AUSTRALIA. FOR INSTITUTIONAL, PROFESSIONAL, QUALIFIED INVESTORS AND QUALIFIED CLIENTS IN OTHER PERMITTED COUNTRIES. Wishful thinking on inflation Theme 3 U.S. core CPI inflation, forecasts and breakeven rates, 2020-2025 Living with 6 )% I ( 4 inflation CP e or High inflation has sparked cost-of- We stay overweight inflation-linked C 2 living crises, putting pressure on bonds and like real assets. The old central banks to tame inflation – playbook principle that recession whatever it takes. Yet there has drives below-target inflation and been little debateabout the looser monetary policy is gone. 0 damage to growth and jobs. Beyond Covid-related supply 2020 2021 2022 2023 2024 2025 We think the “politics of inflation” disruptions, we see three long-term Reported U.S. core CPI Economist median forecasts narrative is on the cusp of constraints keeping the new regime Current 5-year breakeven changing. The cycle of outsized in place and inflation above pre- rate hikes will stop without inflation pandemic levels: aging populations, Chart takeaway: Consensus forecasts have kept underestimating being back on track to return fully geopolitical fragmentation and the to 2% targets, in our view. As the transition to a lower-carbon world. how high inflation would go –and at first overestimated how quickly damage becomes clear, the it would return closer to pre-pandemic levels. We think inflation will Our strategic views have reflected the be persistently higher, unlike market pricing. “politics of recession” will take over. new regime, with an overweight to Plus, central banks may be forced inflation-protected bonds for a few to stop tightening to prevent years now. Market expectations and Sources: BlackRock Investment Institute, with data from Refinitiv Datastream, November 2022. Note: The financial cracks from becoming graylines show consensus economist projections of CPI inflation polled by Reuters. The yellow dot shows floodgates, as seen in the UK when economist forecasts have only current market implied five-year-ahead inflation expectations. Forward looking estimates may not come to investors took fright of fiscal recently started to appreciate that pass. stimulus plans. Result? Even with a inflation will be more persistent. See recession coming, we think we are the graylines in the chart. We think going to be living with inflation. the old playbook means markets We see central banks pausing rate hike underappreciate inflation. See the campaigns once the damage becomes We do see inflation cooling as yellow dot. The market’s wishful spending patterns normalize and thinking on inflation is why we have a clearer. Long-term drivers of the new energy prices relent – but we see it high conviction, maximum regime will keep inflation persistently persisting above policy targets in overweight to inflation-linked bonds coming years. More volatile and in strategic portfolios and maintain a higher, in our view. persistent inflation is not yet priced tactical overweight no matter how the in by markets, we think. new regime plays out. 7 2023 outlook 7 7 2022 midyear outlook BBIIIIMM1122U/M1222U/M--26121472617935--77/16/16