This was the week financial markets faced up to the realisation that low interest rates and subdued inflation may not be a permanent state of affairs. Around the world, bond investors have taken fright. The 10-year yield on US public debt — perhaps the most fundamental market price in the world — has climbed steeply. Market “break-even” expectations of US inflation over the same horizon rose to 2.2 per cent.

In truth, this is a good news story. The market moves reflect not so much fear or pessimism as the opposite: the expected reflation of a depressed US economy, with spillovers to the rest of the world. That is largely due to the enormous fiscal stimulus planned by the Biden administration, and the Federal Reserve’s determination to keep monetary conditions accommodating. Nominal and real rates are both going up, a healthy reaction to the economy’s faster return to full capacity. The absence of a rise in the dollar — often a sign of greater fearfulness — also shows the optimism at the core of the reflation trade.

Newly higher inflation expectations are no cause for macroeconomic worry. If inflation does indeed average 2.2 per cent annually over the next decade, it will still not make up for the past decade’s shortfall in price growth below the Federal Reserve’s 2 per cent target. The fact that market pricing points to higher inflation in the shorter term — the implied five-year rate is 2.4 per cent — means investors trust the US’s central bankers to keep inflation where they want it. Since the Fed’s update of its monetary policy strategy last summer, its chair Jay Powell has been explicit about treating the 2 per cent goal as an average over time, not an upper limit.