Inflation means higher wages and prices, lower stock and bond returns

Inflation's back.

We're paying more at the gas pump, and for health care, tuition, airline tickets, and vacation homes. (If we're lucky, we're experiencing inflation in our paychecks, too.)

For the stock and bond markets, percolating inflation implies a few things.  First, higher inflation means it's harder to earn a "real" return similar to those we've earned in stocks and bonds over the last 30 years.

"The return outlook for equities and bonds will be lower over the next five to 10 years than it has been over the last 30," Inigo Fraser Jenkins, head of the Global Quantitative Strategy Team at AllianceBernstein, wrote in a research note last week.

"We are not precluding the possibility of large positive or negative returns from either asset class on tactical horizons of two to three years as the economic cycle evolves," he wrote. "Instead, what we are referring to is the structural background level of return that we should expect regardless of one's views on the economic cycle."

Heads up, mom-and-pop retail investors: A "real" return is your return on investments after inflation.

Inflation has been fairly low, but no longer.

"The attractiveness of a 60-40 combination of equities and bonds has been unusually high in the last three decades. We forecast that this will not persist. For asset owners who have liabilities ... relative to inflation this will come to be a massive problem," the AllianceBernstein research note added.

There are bright spots to inflation if you're an investor. Buy companies that benefit from it.

Higher inflation in commodities, for example, should support a recovery in sectors such as energy and related industries that suffered when prices declined last year.

Abbott Downing highlights this in its latest special report on crude oil and master limited partnerships, available online ( ).

Bryn Mawr Trust said in its weekly market outlook: "We see more volatility ahead, as the details of fiscal stimulus, tax policy, and regulation, to name just a few key issues, are unveiled. The likely direction of bond yields remains higher, given these events."

Headwinds for earnings include rising inflation and weak international sales, added Bill Stone, chief investment strategist with PNC Asset Management Group in Center City. "Earnings move higher with inflation, but they can't always pass along price increases," he said. 

Stone noted that energy prices are expected to increase on a year-over-year basis well into 2017. As energy price comparisons rise, so too will the headline Consumer Price Index. Headline CPI is expected to grow materially more than core CPI (CPI excluding food and energy prices) for the first time since 2012, according to Stone. 

Central bankers across the globe have stated they are expecting this, "however there is still potential for either consumers or central bankers to misjudge incoming inflation data, sparking even higher inflation expectations. For those reasons, the PNC Economics team currently expects two Federal Reserve interest rate hikes this year," he added.

Another bright spot: banks. 

Wall Street expects S&P 500 earnings growth of 2.8 percent, with the primary driver from financials' earnings growth. Without financials, including Stone's "power trio" of AIG, Goldman Sachs, and Bank of America, S&P earnings would be much lower for the fourth quarter, up just 1.0 percent, he noted. 

Finances for those with disabilities. Paoli’s Royer-Greaves School for the Blind will host a free workshop Saturday, Jan. 21, at 1 p.m. in the gym on its campus, 118 S. Valley Rd., Paoli 19301.

Parents and guardians of people with disabilities may want to look at the financial side of caring for a loved one. Royer-Greaves serves students and is a training center for adults who are blind and have cognitive and other disabilities, but the information covered in the workshop applies to people with any sort of disability.

“ 'How can I be sure this person I love will have what they need for a safe and fulfilling life after I’m gone?’ That's a common question I receive from our parents and guardians,” said the school's executive director, Vicky Mayer.  

The workshop aims to help address topics such as:   

-- How to protect and maximize eligibility for certain government benefits.

-- How to create special-needs trusts and other estate-planning documents.

-- How the Achieving a Better Life Experience (ABLE) Act of 2014 and its provisions compare with alternative options for setting funds aside for people with disabilities.

For information, visit or call 610-644-1810.