Recent rise in commodity prices and bond yields across the world suggest that fear over deflation may have finally subsiding and we might be moving to an era of reflation.

Probable path of moving from deflationary fear to inflationary worry -

First stage: Subsiding deflationary worries

• Since the financial crisis, Market and central banks have remained spooked over the prospect of deflation which since 90's has pushed Japan to economic stagnation.
  
  
• However recent moves in financial markets namely bond yields pose that market participants are becoming less concerned over deflationary fear and rethinking about lending to Governments at such low rates.
  
  
• This however is hardly a move driven by inflationary fear. It is more of a knee jerk reaction to an overly crowded trade. At this stage, reflationary assumptions remain vulnerable and heavily dependent on commodity prices.

Second stage: inflationary confirmation and central bank actions

• Inflation expectations are rising since January this year, however hard data yet to confirm stability. Moreover Central Bankers' projection of inflation remains low and inflation has yet to surprise to upside significantly.
  
  
• At this stage inflation would slowly move towards upward trajectory and bond yields would experience further hardening. Actions by Central banks would follow suit in raising the rates. However rate rise would be much more gradual.
  
• Inflation will be driven by heavy consumption demand and pickup in growth across world.

Third stage: Inflationary worry

• This would be the time to worry for, when central banks have to move aggressively to stem inflation.

• Bond yields would rise faster at this stage, along with rise in commodity prices.