It seems only yesterday that economists were fretting about the dangers of deflation. Now many have executed a spectacular U-turn. Today they are worried about the risk of inflation. It's easy enough to see why. Even though inflation rates are actually negative right now in many countries, every economist remembers Nobel laureate Milton Friedman's famous assertion that 'inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output'. Well, with the amount of money increasing steeply as central banks roll the printing presses in an effort to stimulate business activity, and with output contracting as economies slump into recession, the conditions would certainly appear to be falling into place for a nasty bout of future inflation. The bond market thinks so. Last week, the yield on 10-year US treasury notes rose to within a whisker of 4 per cent, almost double the low in December last year: a clear signal that investors are beginning to get nervous about future price rises. Commodity markets, too, seem to be signalling inflation to come. As demand has picked up over the past few months, the prices of many key industrial commodities have risen steeply. Crude oil, for example, has climbed 66 per cent in price since late February. Even if prices climb no further from current levels, that increase will inevitably have an impact on inflation rates. The two charts below, copied shamelessly from HSBC economist Frederic Neuman, illustrate why. In the first, the blue line shows the price of Brent blend crude over the past two years, with the price per barrel collapsing from almost US$150 last summer to just over US$40 in February, and its subsequent partial recovery. The red line represents what would happen if there were no further change in price from the current level over the rest of this year. The second chart shows the year-on-year price changes over the same period. At the moment, with the oil price down almost 50 per cent from a year earlier, energy costs are deflationary. But as the red line shows, even if prices do not change from current levels, by the end of October, energy prices will be contributing to inflation. Much the same goes for other commodities. But even so, it does not necessarily follow that we need to be getting scared about the possibility of runaway inflation down the road. Look again at that quote from Mr Friedman. It is true, as he said, that inflation 'can be produced only by a more rapid increase in the quantity of money than in output'. But that does not mean that the inverse is also true. That is, it does not hold that a more rapid increase in the quantity of money than in output must produce inflation. If you doubt that, then you need only take a look at Japan's recent economic history. Between 2000 and 2003, Japanese money supply ballooned as the central bank cut interest rates to zero and embarked on quantitative easing, effectively printing money. Yet even so, the economy remained stuck in deflation, with prices continuing to fall. Clearly, something else is needed to propel inflation: sufficient demand. Now - happily from the point of view of inflation fears, but unhappily from the perspective of growth prospects - final demand is looking rather weedy at the moment. True, commodity prices are up from their lows, but according to analysts at independent economics consultancy Lombard Street Research, the pick-up is largely the result of aggressive stockpiling by China rather than any sustainable increase in underlying demand. That's still weak, especially in developed markets. In the US, for example, retail sales rose an apparently respectable 0.5 per cent in May. But that increase was almost entirely driven by higher petrol prices. Demand for everything else was practically flat. With little final demand around, inflation remains a limited threat, despite the contribution of higher commodity prices. That's particularly true in Hong Kong, where weaker private-sector rents and the government's rent and rental waivers will continue to weigh on overall consumer price inflation well into next year. There's quite enough to worry about at the moment as it is, without getting in a flap about the risk of inflation, too.