I’ll always associate rapid inflation with the bland taste of tofu.

Back during Jimmy Carter’s administration, when I was an undergraduate at Boston University, inflation was high, and my income was low. In my bohemian garret near the Charles River, I often ate inexpensive tofu as a substitute for much costlier meat.

Today under Joe Biden’s regime, the latest inflation data are giving me flashbacks to bean curd. However, despite the hyperbolic claims of partisan pundits, we won’t see a return of 1970s-style hyperinflation. The nature of the global economy is vastly different today than it was back then. These days in the U.S., cheap goods from overseas, the diminished power of labor unions, and less reliance on imported crude oil are major forces exerting long-term downward pressure on prices.

Inflation is undeniably hot right now and it’s a negative factor, but it’s counterbalanced by several positives. Let’s look at the pros and cons that are driving markets.

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The Consumer Price Index for All Urban Consumers (CPI-U) increased 0.5% in December on a seasonally adjusted basis after rising 0.8% in November. Over the last 12 months, the all-items index increased 7.0% before seasonal adjustment.

The personal consumption expenditures (PCE) index, the Federal Reserve’s preferred inflation gauge, came in at 5.8% in December, up from 5.7% the previous month. That level exceeded the previous month to become the fastest pace since 1982. Not good.

Rising inflation begs the question: how are profit margins holding up? Apparently, just fine. The blended net profit margin for the S&P 500 for Q4 2021 is 12.0%, which is above the year-ago net profit margin of 11.0% and above the five-year average net profit margin of 11.0%.

The consumer staples sector, in particular, has demonstrated strong pricing power. Transnational purveyors of branded goods are enjoying the ability to raise prices without significant consumer push-back.

As of this writing, estimated net profit margins for Q1 2022, Q2 2022, and Q3 2022 are 12.4%, 12.7%, and 13.0%, respectively (see the chart).

Many companies have been hiking prices to boost their bottom lines, simply because they can. The danger here is that expectations among consumers and businesses for prices to continue rising can become a self-fulfilling prophecy, which would make inflation structural rather than transitory.

On this score, there’s a glimmer of hope. The latest reading of a Fed index that measures household and market expectations of inflation is showing signs that inflation worries are easing, as the public retains faith in the Fed’s ability to rein in rising prices.

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This mix of good and bad news has been triggering sharp mood swings on Wall Street. January overall was dreadful, but on Monday, the last trading day of the month, stocks staged an impressive rebound. The major U.S. indices rose as follows: the Dow Jones Industrial Average +406.39 (+1.17%); the S&P 500 +83.70 (+1.89%); the NASDAQ +469.31 (+3.41%); and the Russell 2000 +59.94 (+3.05%).

Monday’s upward surge followed a powerful rally on Friday. The S&P 500 racked up its best two-day gain since November 2020.

In pre-market futures contracts Tuesday, stocks were trading lower. However, the fundamentals remain encouraging. Notably, corporate earnings and revenue are coming in strong, amid the backdrop of an expanding economy.

The blended earnings per share (EPS) growth rate for the fourth quarter of 2021 is 24.3%, according to the latest data from research firm FactSet. “Blended” combines actual results with projected ones. If 24.3% turns out to be the actual growth rate for Q4, it will mark the fourth consecutive quarter of earnings growth above 20%.

With 33% of S&P 500 companies reporting actual results, 77% of companies have reported a positive EPS surprise and 75% have reported a positive revenue surprise.

The earnings picture has gotten progressively brighter. On December 31, the projected EPS growth rate for Q4 2021 was lower, at 21.4%. Nine sectors are reporting higher earnings today (compared to December 31) due to upward revisions to EPS estimates and positive EPS surprises.

The technology sector is reporting the largest positive aggregate difference between actual earnings and estimated earnings, at +8.6%. Major contributors to higher earnings growth rates include positive EPS surprises reported by Apple (NSDQ: AAPL), $2.10 vs. $1.90; Microsoft (NSDQ: MSFT), $2.48 vs. $2.32; and Intel (NSDQ: INTC), $1.09 vs. $0.90.

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John Persinos is the editorial director of Investing Daily.

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