Russ KoesterichiShares Chief Investment Strategist

Understanding Inflation:Investing with Confidence in Any Inflationary Environment

2 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

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1/52 1/63 1/72 1/81 1/90 1/99 1/08

Volatility of US InflationUS Consumer Price Index

Source: Bloomberg, as of 6/30/10.

The volatility of inflation is now at its highest level since 1954

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

Is Inflation at Risk?

4 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

No double dip

No deleveraging

Fed acted early and aggressively

US is not Japan

5 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

What to watch: Excess capacity

Cap

aci

ty U

tili

zati

on

(%

)

CP

I Y

oY

(%

)

Sources: Bureau of Labor Statistics, Bloomberg, Federal Reserve, as of 2/28/10.

Capacity Utilization and Inflation

3/68 3/74 3/80 3/86 3/92 3/98 3/04 3/10

Capacity Utilization (One-Year Lag) CPI YoY

65

70

75

80

85

90

-4

-2

0

2

4

6

8

10

12

14

16

6 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

What to watch: Jobs

No

n-f

arm

Pay

roll

Yo

Y (

%)

CP

I Y

oY

(%

)

3/68 3/74 3/80 3/86 3/92 3/98 3/04

Sources: Bureau of Labor Statistics, Bloomberg, Federal Reserve, as of 2/28/10.

Job Creation and Inflation

3/10

Non-farm Payrolls YoY (One-Year Lag) CPI YoY

-6

-4

-2

0

2

4

6

-4

-2

0

2

4

6

8

10

12

14

16

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What to watch: Money and inflation

1/06 8/06 3/07 10/07 5/08 12/08 7/09

Sources: Federal Reserve, Bloomberg, as of 2/28/10.

US M2 vs. Monetary Base

M2 Monetary Base

100

125

150

175

200

225

250

275

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What to watch: Money and inflationQ

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Correlation Quarter over Quarter (QoQ) Changes

Money Supply vs. Inflation

Sources: Bloomberg, as of 2/28/10.

-0.05 0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40

0 Lag

2 Quarters

4 Quarters

6 Quarters

8 Quarters

10 Quarters

9 Quarters

7 Quarters

5 Quarters

3 Quarters

1 Quarter

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In the “sweet spot”

Average P/E

CPI YoY Less than 1% 15.62

CPI YoY 1% to 3% 19.24

CPI YoY 3% to 5% 16.95

CPI YoY 5% to 7% 13.18

CPI YoY 7% to 9% 10.34

CPI YoY Above 9% 8.77

Sources: Bloomberg, as of 2/28/10.

S&P 500® Multiples and Inflation Level

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Lower Inflation Higher Inflation

• U.S. large cap

• Healthcare

• Consumer staples

• TIPS

• Energy Producer

• Commodities/Gold/Precious Metals

• Energy

• TIPS

• Treasuries

• Financials

• Consumer discretionary

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The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

11 FOR FINANCIAL PROFESSIONAL USE ONLY – NOT FOR PUBLIC DISTRIBUTION

Inflation and the Presidency

Sources: Bloomberg, as of 2/28/10.

Inflation Data1871–Present

0%

1%

2%

3%

4%

5%

Republicans Democrats

1.2%

4.5%

An

nu

al

Infl

ati

on

Ra

te

Federal SpendingAverage Annual Increase

1914–Present

3.0%

9.4%

0%

2%

4%

6%

8%

10%

12%

14%

Republicans Democrats

4.9%

13.5%

An

nu

al

Infl

ati

on

Ra

te

InflationAdjusted

InflationAdjusted

Questions?

The information included in this material has been taken from trade and other sources considered reliable. No representation is made that this information is complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date and are subject to change. This information should not be construed as research, investment advice or a recommendation regarding any security in particular. No part of this material may be reproduced in any manner without the prior written permission of BlackRock, Inc.

Russ Koesterich is an affiliate of BlackRock Fund Distribution Company and BlackRock Execution Services, which are subsidiaries of BlackRock, Inc.

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