Its nominal interest rates will rise as bondholders fear inflation.

And the reduction in real interest rates via a rise in expected inflation when open ended QE is implemented risks eventually stoking inflation expectations.

Perhaps Asian real currency values will rise sharply as a result of a burst of inflation in Asia.

Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock.

The absence of significant inflation in the past few years does not mean that it won t rise in the future.

When inflation began to rise in the early 1960s, the governor James Coyne ordered a reduction in the money supply.

One reason for a rise in the interest rate would be a shift from low deflation to low inflation.

However, unlike in the United States, inflation continued to rise, to 25 in 1975, giving way to the era of stagflation.

Looking forward, investors can protect themselves against inflation in the US by buying Treasury Inflation Protected Securities (TIPS), which index interest and principal payments to offset the rise in the consumer price level.

At that point, the Fed can focus on its fundamental mandate of preventing a rise in the rate of inflation.

Currently, China s inflation is not as bad as it was in 2007 2008. The rise in house prices has begun to stabilize, and the impact of the rise in commodity prices is tapering off.

Inflation was on the rise before the recession of 2008 struck, mainly because of spiking commodity prices.

In that case, inflation could easily rise to 1980 s (if not quite 1970 s) levels throughout much of the world.

That is because an increase in the inflation rate causes interest rates on new debt to rise by an equal amount.

Ordinarily, a sharp rise in oil prices quickly translates into higher inflation expectations, followed by rising interest rates at all maturities.

The year began with rising food, oil, and commodity prices, giving rise to the specter of high inflation.

In the US, the inflation rate has also been depressed by the rise in the value of the dollar relative to the euro and other currencies, which has caused import prices to decline. This, too, is a level effect, implying that the inflation rate will rise once the dollar's exchange rate stops appreciating.

The massive wall of liquidity that has resulted has triggered inflation, sent real estate prices soaring, and fueled a sharp rise in debt.

The Great Inflation of the early 1920 s, which culminated in a hyper inflation in which prices changed several times daily, destroyed the middle classes and bred the political instability that eventually opened the way to Hitler s rise.

Experts estimate that, in terms of guarding against inflation, the euro s appreciation has been equivalent to about 35 basis points rise in the interest rate.

Historically, a 10 fall in the dollar translates into only a one percentage point rise in inflation. This means that the dollar s 5 fall so far this year will add only half a percentage point to the inflation rate.

So, with no near term risk of inflation or depression, why have gold prices started to rise sharply again in the last few months?

To be sure, all G7 central banks are worried about the temporary rise in headline inflation, and all are threatening to hike interest rates.

In the early 1980s, underemployment, inflation, and the rise in value of the dollar all contributed to a third wave of emigration from the island nation.

And, even if prices remain at current levels for most of the year, global growth will slow and inflation will rise.

The greatest risk to bond holders is that inflation will rise again, pushing up the interest rate on long term bonds.

Higher inflation would cause the interest rate on new debt to rise in a way that prevents the erosion of the real value of the total debt.

But the real fear is not inflation itself that is, that prices might rise at a surprisingly fast clip this year or next.

But the time will come when world interest rates begin to rise, as central bankers prepare to resist the upward creep of inflation.

But the protection against inflation does not prevent a loss of value if real interest rates rise, depressing the value of the bonds.

Gold prices rise sharply only in two situations when inflation is high and rising, gold becomes a hedge against inflation and when there is a risk of a near depression and investors fear for the security of their bank deposits, gold becomes a safe haven.

Scary stories sell newspapers, but in truth all of this sniping at the Fed is overdone. Historically, a 10 fall in the dollar translates into only a one percentage point rise in inflation.

As a result, the Fed has bought a massive amount of bonds without causing the stock of money and thus the rate of inflation to rise.

Gold prices started to rise sharply in the first half of 2008, when emerging markets were overheating, commodity prices were rising, and there was concern about rising inflation in high growth emerging markets.

Or interest rates could rise if people expect a much weaker global economy and, in a weaker global economy with no inflation, investors should be holding more US Treasuries, not fewer.

The rise of the yen and the Deutschemark occurred only 20 years after the catastrophic devastation of World War II, which had inevitably been accompanied by inflation.

Historically, failure to protect against inflation or deflation has helped spur calamitous outcomes. When spectacular inflation hit Germany in 1923, it wiped out the real value of the (unhedged and unindexed) life savings and social security benefits of millions of people, whose anger contributed to the rise of Nazism.

Unfortunately, the purchasing power of Europe s dollars shriveled during the 1970 s, when the costs of waging the Vietnam War and a surge in oil prices ultimately contributed to a calamitous rise in inflation.

Sustained moderate inflation would help to bring down the real value of real estate more quickly, and potentially make it easier for German wages to rise faster than those in peripheral countries.

There was always uncertainty over the extent to which central banks should attempt to correct or limit asset price bubbles when there was no corresponding rise in the general level of inflation.

Looking back on the past year, the 6 rise in the renminbi dollar exchange rate might understate the increase in the relative cost of Chinese goods to American buyers because of differences in domestic inflation rates.

In other words, the low inflation era will become the lower inflation era.

Germany, traumatized by the memory of hyperinflation in the 1920 s and the consequent rise of Hitler in the 1930 s, is reluctant to sow the seeds of future inflation by incurring too much debt.

OECD inflation fell from an annual average of 3.7 in 2008 to around 0.5 in 2009. It has now started to rise again, but from a low level, mainly as a result of a turnabout in commodity prices.

Yet stumbling oil export performance and a sharp rise in infrastructure related imports, combined with an explosive growth in public spending, have fueled consistently high levels of inflation, with the annual rate now at more than 20 .