Inflation or Deflation? Which is the Consensual Opinion? Weekly Chart Update 19/3/11

Using google insights, I attempt to gauge the ‘winning’ side of the famous ‘inflation vs deflation’ debate. This week’s chart update shows that inflation worries are starting to be overcome by deflation worries. Since the 2009 low, fears about inflation have been on the rise, and their antithesis – deflation fears – have been waning. The charts below could indicate a reversal of this trend.


The first chart uses plain search volume indices from google insights, whereas the second chart uses the relative out-performance of those indices (over searches about ‘finance & investing’). I invert the ‘deflation’ parts (red) 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.


Inflation Vs Deflation Search Volumes

Click to enlarge. Source: google insights

Inflation Vs Deflation Search Volumes (Rate of Change)

Click to enlarge. Source: google insights

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).


I contend that these charts can be helpful to the contrarian investor. When the prevalent opinion is ferociously geared towards an inflationary future, the contrarian can find bargains in insuring against deflation (put options, conventional bonds etc.). Conversely, when the consensual mind is obsessed about deflation, the contrarian can find bargains in insuring against inflation (gold, call options, tips, ‘risk’ etc.). The more aggressive speculator might even underwrite the most feared prospect at any time (e.g. write puts during deflation panics and write calls during inflation manias).


The charts above show that deflation fears are beginning to dominate. Typically, the momentum in rising deflation fears is large, powerful and sweeping. We might easily see spikes lower in the yellow lines, (and witness the rise of safe-haven trades with them). Perhaps it’s a little late for the exclusively contrarian investor to purchase ‘deflation insurance’; however, there could be downward momentum that can be captured by other (momentum-based) strategies.


Inflation Vs Deflation Free Ebook


See here for our collection of rare historical economic data.

Posted Mar 19, 2011