They are currently quite interrelated, with the rundown in China’s foreign exchange reserves probably in part comprising sales of US treasuries and other sovereign bonds, because of their greater liquidity, thereby affecting global long-term yields. We are seeing an unusual situation where a risk-off environment is associated with sales of the risk-free assets by a large market participant, rather than purchases.
I would speak of deflation when both prices and output are falling and the problem is getting worse and worse – because people don’t invest or consume when they are waiting for prices to fall further. So far, that hasn’t been the case. However, inflation rates throughout Europe are extremely low and far removed from 2%, from what central bankers define as price stability.