April 23, 2026

Inflationary Now, Deflationary Later [Part 1]

by Ewen Emmerson

in General News Insights Research

Part One: The Age of Scarcity

This piece has been in our planning since early in the year. We had intended to publish it as a forward-looking argument about why we believe inflation will remain more volatile this decade than most investors expect. Events in the Middle East overtook the drafting, and we held it back. In hindsight, the delay was useful. The conflict has provided the most vivid possible illustration of the thesis we were already building. But the thesis is broader than the conflict, and it will outlast it.

In our 2026 Investment Outlook we described what we called the enduring scarcity trade: a world where fiscal activism, supply constraints, and the energy transition intersect. Prices, we argued, increasingly reflect structural scarcity rather than cyclical overheating. The defining feature of this decade would not be a single inflation level but inflation volatility, and portfolios needed to be built accordingly.

Six months on, we see no reason to change that view. If anything, the case has strengthened.

The energy system is being rebuilt, all at once

The most consequential of these scarcity pressures comes from the energy system itself. The world is attempting three things simultaneously: electrify its economy, secure its energy supply, and rebuild the infrastructure that connects generation to consumption. Each of these is a generational programme. Pursued together, across multiple continents at the same time, they represent one of the largest sustained demands on physical resources in modern economic history.

Electrification requires copper on a scale the mining industry is not currently configured to deliver. Every electric vehicle, every charging station, every kilometre of upgraded grid cabling, every new connection to a wind farm or solar installation depends on it. Lithium, cobalt, and rare earths face similar constraints as battery manufacturing scales. Supply lead times for new mines are measured in years, not quarters.

The grid itself is the bottleneck beneath the bottlenecks. Decades of underinvestment in transmission and distribution infrastructure have left power networks in many countries unable to handle the loads that electrification and data infrastructure demand. Upgrading and expanding these networks is unglamorous, capital-intensive work that competes for the same engineering talent, copper, steel, and planning capacity as every other part of the transition.

Nuclear: the baseload anchor

Intermittent renewable generation, however much of it is built, cannot on its own deliver the reliable baseload power that electrification and AI infrastructure require. Governments have increasingly recognised this. Over a hundred new nuclear reactors are now planned or under construction globally, concentrated in China and the United States but extending to other economies that have concluded nuclear is essential for energy security and grid stability.

This is a structural demand story for uranium that will persist for decades. The uranium market was already tight before the current Middle East disruption. New reactor commitments are being made faster than new mine supply can respond. The lead times involved, from planning approval to first power, mean that the demand signal is visible today even though much of the capacity will not come online for years. We hold uranium exposure in our portfolios precisely because we believe this is a multi-year structural position, not a momentum trade.

Defence, AI, and the competition for the same inputs

The energy transition is not operating in isolation. Defence spending is accelerating across the Western world. The reindustrialisation of military capacity after decades of under-procurement competes directly for the same materials, fabrication capacity, and engineering talent. Semiconductor manufacturing, the backbone of both the AI revolution and modern defence systems, depends on helium, ultra-pure water, and a small number of highly specialised facilities, several of which sit in geopolitically exposed locations.

Artificial intelligence, often framed as a deflationary force over the medium term, is in the near term intensely resource-hungry. Datacentres require enormous quantities of power, cooling water, and chips. The race to build AI infrastructure is adding to electricity demand at a pace that many grid operators did not anticipate even two years ago. India alone is expected to add computing and cooling capacity on a scale that represents one of the largest single demand stories for copper and power generation anywhere in the world.

The critical point is not any one of these in isolation. It is that they are all happening at the same time, drawing on the same finite pools of capital, labour, materials, and processing capacity. The competition between them is the inflationary force.

Food, water, and the foundations

Beneath the industrial and technological demands sits a food and water system under growing strain. Global water availability per person has fallen by almost two thirds since 1960. Fertiliser supply chains run through some of the world’s most vulnerable chokepoints, and their disruption feeds through to food prices with a delay of months, not weeks. Drought conditions across much of the United States, combined with the rising probability of a significant El Niño event, point to upward pressure on food prices through the second half of 2026 that is not yet reflected in consensus forecasts.

The conflict as accelerant, not cause

The Gulf crisis did not create these pressures. It revealed them. The disruption to energy infrastructure, the fragmentation between financial and physical oil prices, the squeeze on fertiliser and helium, the logistical complexity of rerouting global shipping; all of these are symptoms of a world where physical chokepoints and supply chain fragility matter far more than they did a decade ago. The conflict has accelerated timelines that were already shortening and exposed vulnerabilities that were already present. The next shock, whenever and wherever it arrives, will land on the same structural scarcity.

This is not the 1970s, and it is not 2022

When energy prices spike, the instinct is to reach for historical comparisons. The 1970s are the worst case: sustained oil shocks feeding into wages, wages feeding back into prices, and central banks forced into a painful recession to break the cycle. The more recent memory is 2022, when the invasion of Ukraine sent energy prices surging, UK inflation peaked above 11%, and central banks delivered the sharpest tightening in a generation.

We think neither comparison is the right one for today. The critical variable is wages. In the 1970s, powerful unions and indexation mechanisms transmitted energy costs directly into pay settlements, creating a self-reinforcing spiral. Central banks initially made things worse by easing policy to offset the recession, effectively validating the spiral. It took the Volcker shock in the US and a deliberate policy of high rates in the UK to break it. In 2022, the shock arrived into a labour market already overheated by pandemic-era stimulus, with wage growth running well above any sustainable level. In both cases, the combination of rising energy costs and rising wages is what made the inflation persistent and forced central banks to act aggressively.

That mechanism is not present today. Wage growth has been declining and now sits close to the level consistent with 2% inflation over the medium term. The inflation we are experiencing is cost-push from physical constraints, not demand-pull from an overheated economy.

What this means for investors

We do not treat real assets as a single trade. We view them as a toolkit, with roles that include diversification, inflation volatility resilience, and exposure to the long-duration investment programmes that are reshaping the physical economy. A world defined by structural scarcity rewards exposure to the businesses and resources that the world is competing to secure. It rewards pricing power, strong balance sheets, and patience over concentration and momentum.

We should be honest about one important nuance. The very investment being driven by these scarcity pressures will, over time, expand capacity and begin to change the cost structure of the economy. The buildout phase is inflationary; the operational phase may not be. Technology, including AI, is beginning to compress costs in measurable ways. The inflationary forces we have described are real and present, but they are not necessarily permanent. At some point the balance will shift. The question is when, and how bumpy the path will be. That uncertainty is itself a defining feature of this period, and navigating it is, we believe, one of the more important challenges facing investors today.

We will explore those countervailing forces, and the question of timing, in Part Two.