Inflation or Deflation? Which is the Consensual Opinion? Weekly Chart Update 5/3/11
Here are the updated google insights charts for the inflation/deflation debate:
EDIT: Although the second chart says ‘ROC’ and ‘rate of change’, it is in fact a measure of ‘deflation’ and ‘inflation’ search volumes relative to the ‘finance’ category search volumes. The rudimentary principle still applies (yellow line up => inflation worries, yellow line down => deflation fears).
Just a quick explanation: Both of these charts are aimed at gauging the consensus opinion in the inflation vs deflation debate. The top chart uses plain search volume indices from google insights, whereas the bottom chart uses the relative outperformance of those indices over the ‘finance category’ search volume. In both charts, I invert the ‘deflation’ parts to show how the two search items are competing with each other. When the blue parts are high, people are searching for ‘inflation’. When the red parts are very negative, people are searching for ‘deflation’. The yellow line is the aggregate of these two. When it is rising, inflation fears dominate, and when it is falling, deflation fears dominate.
For the contrarian investor, it can help indicate the most consensual opinion (so that it can be opposed in one’s trades). For example, when there is a spike lower in the relative out-performance chart, one might consider underwriting the risk of deflation and insuring against inflation. Likewise, if the indicator is high; one might consider underwriting the risk of inflation and insuring against deflation.
Right now, the top chart still indicates that the consensual mind is relatively concerned about inflation. The second chart indicates something potentially interesting: the indicator has ticked down off – perhaps – a high. This could be a precursor to a more profound downward deflationary move. Whether that move would be small or cascading has yet to be seen.
[Note: these charts are dependent on the data from google insights. They sometimes change the structure of the index, which can change the look of the above charts to a small extent.]