Inflation Killer

By ,

Are you confused yet about what exactly a recession is?

You are not alone.

As far as I can remember, it’s usually been defined by two consecutive quarters of negative GDP growth.

But it seems that’s out the window now.

While the US hit a technical recession last week, US President Biden was quick to come out and say that’s not the case — mainly because unemployment is still at lows.

Things got so heated that people started to furiously edit the definition of recession on Wikipedia…so much so that Wikipedia had to restrict access.

So the debate rages on.

But the point is, we are swimming in muddy waters. There’s been a lot of meddling in the economy, and now indicators are skewed.

There’s war, talk of recession, high inflation, rising interest rates, and geopolitical instability.

Yet the stock market keeps shrugging off concerns on the expectation that if things turn south, central banks will do a U-turn on raising interest rates.

On the other hand, yes, unemployment is low. So low, in fact, that there are worker shortages.

The question is if it will last.

People are employed, but they are paying more for food, energy, etc. Interest rates are rising, costs of living are increasing, but salaries aren’t keeping up.

Now central banks are raising interest rates to stop consumer spending. So the danger is that they raise too much and unemployment starts to rise, which will really affect demand.

But the thing is, most of this inflation is coming from the supply side — from supply chain disruptions and high energy prices.

The pandemic first and then the Ukraine-Russia conflict have delivered a one-two punch that’s brought a serious bout of inflation worldwide.

And what’s becoming clear now is that one of the things we need to do to alleviate these supply-side woes is to accelerate the renewable energy transition.

The solution to inflation

There’s been some big moves recently to do just that.

One of the big surprises in the last week was the announcement of the US Inflation Reduction Act (IRA).

If it passes, which could be as early as this week, it will be one of the most significant investments in clean energy to date. The deal will bring in US$369 billion in funding to cut US emissions by about 40% by 2030.

The money brings in a range of provisions to reduce households’ energy bills, including money to make homes more efficient and tax credits for EVs, heat pumps, and solar panels.

The announcement sent clean energy stocks skyrocketing.

The First Trust NASDAQ Clean Edge Green Energy Index Fund [QCLN] has risen by almost 16% since the announcement.

Of course, it’s not been the only push to accelerate the transition we’ve heard recently.

Here in Australia, high energy costs drove electricity prices to an all-time high of $264 per megawatt hour in the June quarter. That’s three times higher than the same time last year.

Proof that while we still produce much of our own coal, energy markets are very interconnected.

So it was great to see that during the Clean Energy Summit, the Australian Energy Market Operator’s (AEMO) CEO Daniel Westerman pressed to move faster towards renewables:

The sooner our nation can integrate higher levels of firmed renewables into the energy system, the sooner we can decouple domestic energy prices from these international shockS, the sooner we can electrify more of the economy, the sooner we can meet our emissions targets, and the sooner we can reduce stress on Australian homes and businesses.

Indeed.

Renewables are deflationary

While much of the rhetoric about the energy transition has been centred on climate, make no mistake, this is driven by economics.

Renewables are deflationary.

The cost of renewables comes from investing upfront, but once that infrastructure is built, you can catch energy from the sun and wind.

On the other hand, fossil fuels get more expensive the further you have to dig to get them. Not to mention they are subject to energy shocks like the one today.

Renewables are now the cheapest source of energy in history and deploying them faster should help curb inflation.

It’s good to see that countries are starting to realise this.

The energy transition is a once-in-a-lifetime opportunity, and a lot of money will pour into the energy transition.

Until next week,

Selva Freigedo Signature

Selva Freigedo,
For Money Morning

Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.

About Selva Freigedo

Selva Freigedo is an analyst at Money Morning. She has a background in financial economics, but what makes Selva´s experiences different to many are the places she has lived and worked. Born in Argentina, she has also lived in Brazil, the US, Spain, and now Australia. She has seen up…

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