For the last few years, there has – overall – hardly been any inflation in the developed economies.
Here, overall prices, as shown by the Consumer Price Index, are at the same level as they were in 2012, a remarkable period of stagnation.
US inflation has now picked up to the heady heights of 1.6 per cent, and international bond markets are reflecting the view that prices are now set to rise more generally.
US president-elect Donald Trump has promised to increase government spending – and thus, could push up prices in the US.
Higher oil prices after the recent deal among producers pushed up crude prices sharply on Monday and led to a sell-off in bond markets .
Even in Japan, which has been battling deflation on and off for decades, there are hopes that the weakening yen against the US dollar is starting to push up prices, albeit slowly.
Low by historical standards
The bond markets have started to react. In the US, ten-year interest rates have gone over 2.5 per cent for the first time since 2014.
The US is ahead of Europe in the cycle, and the Federal Reserve Board is widely expected to announce a rise in short-term interest rates by 0.25 of a point on Wednesday.
In Europe, the bigger increases have been in longer-term rates – it will still be quite some time before short-term interest rates are on the rise.
It is wise to keep this in perspective. Rates of economic growth and inflation remain very low by historical standards.
And a lot of the change in sentiment in recent months has followed the US presidential election – and it remains to be seen what Trump, as US president, will actually do.
All that said, bond markets have been in a bubble for quite some time, driving longer term interest rates down to extraordinarily low levels.
When investors are effectively paying big economies such as Germany to lend them money, you know something is out of kilter.
And so, if oil prices continue to remain firm – and the evidence builds that inflation really is “ back” – the financial markets could be in for quite an adjustment.
