There's a lot of angst these days over the threat of rising inflation. Sensitive market prices are saying don't worry about it, but economists are worrying nonetheless. Should you worry, too? No. Markets are smarter than economists.
 
Key leading indicators are showing 5 percent to 6 percent real growth of gross domestic product this year, with roughly 2.5 percent inflation. This is quite a good scenario. It's a pro-stock market scenario. It's a pro-growth scenario. It's an anti-budget-deficit scenario. And it's a George W. Bush-for-president scenario.

 Liquidity and inflation indicators do not suggest that virulent inflation is headed our way. The mere hint of a slightly less-accommodative policy from the Federal Reserve has driven down the prices of gold and other metals by roughly 10 percent this spring. (Commodities, remember -- in particular gold -- are leading indicators of changes in general price levels.) And even with rising energy prices, the Commodity Research Bureau's broad-based futures index has declined about 6 percent.

 True enough, consumer prices have moved up to 3 percent and producer prices have jumped to 5 percent. However, buried inside the latest producer price report, crude materials (less food and energy) have registered a 19 percent annual decline rate over the past three months, picking up the recent commodity weakness. The 10-year Treasury -- another inflation-sensitive indicator -- is hovering around a historically low yield of 4.7 percent.

 All of this suggests that the current inflation rise will prove to be moderate in scope and relatively short-lived in its duration.

 The Fed's emergency liquidity injections of 2003 and early 2004 have fed through to higher inflation faster than the central bank expected. So the Fed's open-market committee intends to remove this liquidity in the months ahead. Good. In all likelihood, we can expect one-quarter-point increases in the fed funds base policy rate at each meeting over the next year and a half. That's a measured removal of excess liquidity.

 But let's not forget some important counter-inflationary factors that are alive in the economy. At lower tax rates, the economy will supply more investment and output. Therefore, if inflation is caused by too much money chasing too few goods, we can expect stepped-up production of goods and services to reduce inflation from the supply-side.

 Strong productivity-growth trends similarly increase the economy's potential to grow. This factor also reduces the economy's cost structure, as do the Bush tax cuts. Hence, more goods will absorb excess liquidity.

 The combination of a mild dose of monetary restraint along with faster economic growth should act to moderate inflation pressures. It's a good policy mix, and one that will produce GDP growth of 4 percent or more over the next few years with inflation just above 2 percent.

 Politically, however, it's the near-term economy that counts. The sense has been that the fledgling Bush boom has not yet registered with the public at large. But not so fast. Continued...