Before The Bell - The bulls have won another round in the debate over whether rising inflation is transitory or not. That is apparent as the major stock market indexes moved up, even after clear signs of rising consumer prices.

The week’s next-to-last session saw the Dow Jones Industrial Average edge 19 points higher; the S&P 500 rise 20 points to close at a record high; and the NASDAQ add 109 points. The Dow had been up by 290 points but settled well off its best level.

The gains came about despite a report showing that both the headline Consumer Price Index and the so-called ``core’’ CPI (excluding volatile food and energy prices) for May rose more than expected. Inflation on an annual basis is also increasing at the fastest pace in years.

Investors largely shrugged off the news on the view that once the materials shortages and supply-chain backlogs caused by the pandemic clear up, inflation will calm down.

The bond market is certainly not alarmed by the data showing a broad rise in prices. The yield on the 10-year Treasury note has been pushing down into the lower part of its range of the past few months, and closed at 1.46% yesterday, falling from 1.49%. Bond yields would likely be jumping if inflation was seen as a serious threat. 

Meanwhile, the price of gold, a traditional inflation hedge, has not shown signs of breaking out, either.  

The bottom line is that stocks are holding up pretty well on news that might have hurt sentiment under a different set of circumstances. There is still a risk that inflation will prove more lasting than temporary. That change in mindset, should it come about, would be a negative for stocks.

The Federal Reserve has the tools to fight inflation, of course, but having to implement them would mean higher interest rates and less, if any, bond-buying. That would take away strong supporting factors for the equity market.

Then again, stocks are not racing higher, as they did for parts of 2020 and 2021. Yesterday’s market action showed only slim pluralities of advancing issues versus decliners on both the New York Stock Exchange and the NASDAQ. The Dow Transportation Index and the Russell 2000 small cap index also retreated somewhat. 

But, overall, investors are mostly looking past the pickup in inflation for now, and may even take the rise in prices as a sign of the economic recovery.

Stock futures are slightly higher about an hour ahead of the opening bell. - Robert Mitkowski   

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.