BlackRock Inc. joined Pacific Investment Management Co. in recommending inflation-linked bonds and warning costs are poised to pick up.

“Stabilizing oil prices and a tighter labor market could contribute to rising actual, and expected, U.S. inflation,” Richard Turnill, BlackRock’s global chief investment strategist, wrote Monday on the company’s website. “We like inflation-linked bonds and gold as diversifiers.” New York-based BlackRock manages $4.6 trillion.

Federal Reserve Chair Janet Yellen, in a speech Tuesday in New York, said she was confident inflation would gradually return to the Fed’s 2 percent goal. Pimco, which manages the $87.8 billion Total Return Fund, and BlackRock have both told investors this year that inflation is picking up.

Treasuries gained after Yellen said caution in lifting rates is “especially warranted" as the global economy presents heightened risks. The speech made a case for running the economy hot to push away from the zero boundary for the Fed’s target rate.

David Fuller's view

From the Fed’s perspective, they would much rather keep rates low and deal with inflation later, rather than risk having to roll back premature rate hikes because the US economy slipped into recession. 

This is nothing like the 1970s script of the Aladdin inflation genie escaping from the bottle, causing every employed person to expect significant annual salary increases.  Today, we still live in a deflationary environment, due to slow global GDP growth following the credit crisis collapse of 2008, plus the positive deflationary contribution from accelerating technological innovation. 

Inflation-linked bonds may be OK but I would prefer to have diversified international equities with sustainable yields of 3% or more plus some growth prospects, despite the volatility of stock markets.  We are in rangebound markets so these should be purchased on dips. 

I would also have some monetary metals and their shares, because PMs are gradually being remonetised in the eyes of investors.  These are volatile and also best picked up following reactions.   

See also: Barclays Says Commodities to Slump on a ‘Rush for the Exits’

The commodity sector rally shown on the Continuous Commodity Index and the CRB Commodity Index was mainly due to short covering, as I have mentioned previously.  This is not unusual in extremely depressed markets.  Therefore we could easily see a partial retracement before the recovery continues.  However, I do not expect many commodities to retest their lows because, ’the cure for low prices is low prices’.  In other words, loss making production is gradually being curtailed and demand is also increasing.