The “I” word is back in the news. That’s “I” for inflation. Prices are rising across a broad front and people are seeing it at the pump, in the supermarket, in prices for new homes, raw materials, transportation and more. Inflation is a worry for both stock and bond investors. It should be.

The money supply and government spending are surging. The Fed is pumping out liquidity and Treasury is adding its own fuel to the fire. The growth of the money supply and Fed and Treasury actions mean that demand is rising faster than production.

Hmmm. “Too much money chasing too few goods” was Milton Friedman’s simple explanation of rising inflation, a monetary condition. He was right.

But the “I” word is not my only subject today. As prices rise from COVID-depressed levels, Fed Chief Powell insists that the increase in the inflation rate will be “transitory.” I don’t recall hearing the “T” word before Powell began to pepper his talks and Q&A sessions with it.

“Temporary” and “short-lived” are words everyone understands, but transitory? The dictionary’s simple meaning is “not permanent” or “temporary.” Powell would do well to use those.

But how do we determine whether something is temporary (excuse me, transitory) except by looking back later? After three months? Six months? A year? Powell has not said and may never say, but the bond market will let us know by pushing rates up.

So far, interest rates have increased, but not to the degree they would if rising inflation were expected for long. If that changes and the rate on the 10-year Treasury breaks through 2% en route to 3 or even 4%, bonds would suffer and stock investors would conclude that rising inflation is no longer temporary. Valuations would (and should) reflect its long-term damage.

Bond investors may be reaching that point soon. The futures market expects the first rate increase to come in next year’s second half, not in late 2023 or 2024 as Powell tells us. Before the Fed raises rates it will taper then stop its monthly purchases of bonds and mortgage-backed securities. In the past such reductions set off what became known as “taper tantrums.”

I will go with Powell on this, at least for now. By late summer or fall people will have spent their stimulus checks and catch-up buying to build supplies and stock shelves will have run its course. Shortages of some key products, such as lumber and computer chips, will have been mostly resolved and production will increase. GDP growth will slow from a fast rate this quarter.

Investors haven’t given up on stocks despite the inflation fears. They are on board with the bull market. They should be. What other asset class offers such upside? None.

David Vomund is an Incline Village-based Independent Investment Advisor. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.