Core inflation, which excludes temporary or short-term price volatility from things like oil, has "been modestly drifting up and we are seeing the beginning of wage pressure," said John Bilton, head of global multiasset strategy at JPMorgan Asset Management. For 2016, "one of our core calls is for low inflation, but not no inflation."
Bilton also believes many forecasters' inflation expectations could overshoot his own, and their worries could have an amplified effect on things like interest rates and asset prices.
That is why investing with inflation in the air requires strategic thinking about the various elements of your portfolio. Bonds and CDs are a classic case in point. The real value of any fixed rate income-yielding asset will decline in an inflationary environment, so Bilton is advising investors to be "tactical" with bond investments.
He expects long-term U.S. rates to end 2016 in the range of 2.75 percent, hardly a scenario for superstar returns in long-term bonds.
Stocks, on the other hand, could fare well, Bilton said. He projects U.S. equity market returns in the 6 to 8 percent range in 2016. A year where long-term interest rates rise slowly but steadily, and inflation is gradually normalizing, is "very benign for equities," he said.
"A lot of folks around think U.S. stocks have had their day. We disagree with that," he said. "The U.S. is a stable domestic growth story."
Bilton also expects European stock markets to perform well, and he is watching the dollar especially closely. If an interest rate hike in the U.S. leads to less divergence in economic growth around the world, the dollar could stabilize around midyear, and that could be a point where emerging markets "find their footing."
As for commodities, Bilton believes oil prices could become more stable, but his firm remains generally bearish on commodities like the base metals.
Gold has long been seen as a hedge against inflation, but Bilton pointed out that "the one thing you know about gold with absolute certainty is it is going to give you zero return." And a 2013 study in the Financial Analysts Journal found that while gold "may be a good inflation hedge over many centuries, it is a poor inflation hedge for horizons up to 20 years" (the relevant horizon for most investors).