Inflation or Deflation? Which is the Consensual Opinion? Weekly Chart Update – 27/3/11

Using google insights, I try to gauge the consensual opinion in the popular debate of inflation vs deflation. This week’s chart update shows the continuing trend towards more pronounced deflation fears. Since the March 2009 low in risk assets, market participants have become increasingly worried about inflation. The indicators shown below suggest that a new trend of rising deflation fears could have begun a few weeks ago.


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 Chart - Google Insights

Click to enlarge. Source: Google Insights.

Inflation Vs Deflation - Google Insights (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 believe that – at extreme levels – these charts can be useful for the contrarian investor. Put simply; a contrarian can seek to insure against inflation when everyone is worried about deflation, and he/she can seek to insure against deflation when everyone is worried about inflation. The basic premise behind this is that; when people are en masse convinced about the future course of prices, their actions are likely to defeat themselves and one can find opportunities in taking the other sides of their trades.


Right now, we’re seeing declining yellow lines; meaning, an increase in deflation searches relative to inflation searches. As can be seen from history (on these charts), the shifts in focus towards deflation are often sharp and violent. We’ll have to see how next week plays out; but we could be on the verge of another deflationary twist.


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Posted Mar 27, 2011