“Do you remember inflation? To some people it is starting to show signs of life,” writes Floyd Norris in today’s New York Times.

“That is not necessarily horrible news. As the Japanese well know, deflation can be a horrible thing, and at the height of this country’s economic woes last year, there was a little evidence of deflation here. Now that evidence has gone.”

“As it happens, the financial markets provide a handy measure of inflation expectations: the difference between yields of normal Treasury securities and those that offer a lower guaranteed yield but add in inflation protection. That differential is the break-even inflation rate, as measured by the Consumer Price Index.”

“Last fall, the break-even inflation rate on 10-year Treasuries fell to 1.3 percent. Now it is up to 2.1 percent. Anyone with a strategy of betting on higher inflation expectations has done well.”

“That is also true in the stock market. James Bianco, the president of Bianco Research, points out that since the Federal Reserve’s last reduction of the federal funds rate, to 1.75 percent on Dec. 11, the stock market stars have been the kind of companies that benefit the most from inflation. Over all, the Standard & Poor’s 500-stock index is down 3.4 percent. But the best-performing industry group is gold stocks, up 37 percent, with industries like forest products and oil and gas drillers not far behind.”

“Past is not always prologue, of course, and just because inflation expectations have risen does not mean they will continue to do so. A sustained period of 2.1 percent inflation — the current market forecast — would be just fine with most people. ‘The stock market is saying we avoided the deflation trap,’ said Robert Barbera, the chief economist of Hoenig & Company. ‘I’m not willing to declare that inflation is off to the races.’ “

“But Mr. Bianco is worried. ‘The market is trading like we don’t have price stability,’ he said yesterday. ‘If it were to stop here, I would not get that worked up, but why wait until it is bad?’ He thinks the Fed should move quickly to raise rates.”