Inflation or Deflation? Which is the Consensual Opinion? Weekly Chart Update – 2/4/11

An update of the weekly google insights chart for 2/4/11. This chart can be used to gauge the prevailing opinion in the inflation vs deflation debate. This week’s chart update shows the continuing trend towards more pronounced deflation fears.

 

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

Click to enlarge. Source: Google Insights

Inflation Vs Deflation Chart (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). [Thanks to Floyd for noticing the inconsistency of the second chart.]

 

I contend that – at extreme levels – these charts can help the contrarian investor to decide on when to execute trades against consensually-minded market participants. In short, the contrarian would be looking to insure against inflation when deflation fears dominate, and insure against deflation when inflation fears dominate.

 

 

So far, the charts show that an extreme in inflation worries was reached a few weeks ago, and that now deflation fears are beginning to take hold. We’ll have to see how the market behaves over the coming months, and we should be wary of that ‘high’ being taken out. However, if that was a peak in inflation fears (relative to deflation fears), then the move downwards could be as rapid and pronounced as it has been in the past.

 

Inflation or Deflation Free Ebook

 

See here for our collection of rare historical economic data.

Posted Apr 2, 2011
  • Floyd

    Aftab,
    Interesting thesis.
    Any chance the first and second charts are inconsistent wrt to the color coding and polarity(+,-) of the inflation- and deflation- searches/roc?
    Thanks,

    • http://greshams-law.com Aftab Singh

      Floyd,

      Thanks for your intrigue; it turns out that it’s justified. Although, the polarity and colours are right, something else is a bit off (as you rightly suspected). I mixed up the charts in my file: – the second chart in fact shows the growth of the search term (‘inflation’ and ‘deflation’) relative to the finance category’s search volume. I’ll edit these posts to get that sorted.

      The rudimentary principle was still valid though: yellow line goes up => inflation worries, yellow line goes up => deflation fears.

      Thanks again!