JPMorgan Warns of Rising U.S. Inflation Risk, Suggests Hedging with Commodity-Related Assets

JPMorgan Private Bank warned in its latest report that the US economy may be entering a new era of inflation. Consumer price growth may remain higher than the Federal Reserve's 2% target for the long term, and recurring price shocks will become a new variable that investment portfolios must face.

The bank believes that post-pandemic supply disruptions, price pressures from the Russia-Ukraine war, and the surge in oil prices after the Iran war are all reinforcing sticky inflation. The report compares the current environment to the 1970s—when the US experienced a period of stagflation with high inflation, high unemployment, and low growth, with CPI rising from about 1% in the early 1960s to a peak of 14.8% in March 1980.

The core concern in the report is that successive shocks may cause high inflation expectations to reinforce themselves. If businesses, consumers, and investors start to take it for granted that prices will keep rising, inflation will no longer be just a short-term disturbance but will turn into a long-term risk premium in asset pricing.

“The unsettling lesson from the 1970s, and also a risk that exists today, is that when price shocks occur consecutively, price shocks may quickly become normalized.”

In terms of asset allocation, JPMorgan believes that if inflation continues to exceed the Federal Reserve's 2% target, the traditional 60/40 equity-bond portfolio may face greater pressure, as a high inflation environment will suppress both stock valuations and bond prices, weakening the protective role of stock-bond diversification.

The bank advises investors to refocus on assets related to commodities, with specific directions including commodity-related stocks, infrastructure, and real estate. These assets are more likely to benefit from rising prices, or offset some of the erosion of inflation on wealth through cash flow, rents, and resource price transmission.