In recent years, deflation was considered one of the biggest threats to the global economy. These fears are vanishing. As deflation becomes the thing of the past (there was even the end of deflation in Japan at the end of 2016), reflation is now attracting the attention of investors. What does it mean? According to the most popular definition, reflation is an increase in economic activity and inflation, usually caused by using inflationary measures to reverse deflationary trends. We simply take reflation to be acceleration in the rate of inflation, i.e. the opposite of disinflation, which is a decrease in the rate of inflation.
Is the inflation rate increasing in the world economy? Well, let's look at the chart below. As one can see, inflation has recently risen both in the U.S. and the euro area. In the former, the annual inflation rate has increased from 0 percent in September 2015 to 2.1 percent in December 2016. In the euro area, the acceleration has come a bit later due to stronger deflationary forces, but the inflation rate has risen from -0.24 percent in April 2016 to 1.1 percent in December 2016. In particular, the consumer prices rose 1.7 percent in December in Germany, the euro area's growth engine. This was the fastest pace since July 2013.
Chart 1: The CPI rate year-over-year for the U.S. (blue line) and the euro area (red line) over the last ten years.
Inflation expectations also have risen significantly since the summer of 2016, as one can see in the chart below.
Chart 2: The monthly averages of U.S. spot inflation expectations derived from 10-year Treasuries (red line) and the forward inflation expectations derived from 5-year and 10-year Treasuries (blue line) over the last ten years.