Fears of Deflation Continue to Make Headway…

This week’s update of the ‘inflation vs deflation’ indicators show that fears of deflation continue to make headway. That being said, extreme levels of deflation fears (versus inflation worries) are not present yet.


The following two charts use data from google insights (google’s tool for gauging patterns in search) to figure out the prevailing opinion in the inflation vs deflation debate. The idea is to show how searches for ‘inflation’ are competing with searches for ‘deflation’. When people are searching for ‘inflation’ with greater vigor than they are searching for ‘deflation’, it is assumed that inflation fears dominate. Conversely, when people are searching for ‘deflation’ with greater vigor than they are searching for ‘inflation’, it is assumed that deflation fears dominate. The contrarian investor can use these indicators to oppose each conviction at its extreme.


inflation vs deflation indicator (google insights)

Click to enlarge. Source: google insights

inflation vs deflation indicator (relative)

Click to enlarge. Source: google insights


[The first chart uses plain search volume indices from google insights, whereas the second chart uses the relative out-performance of those indices (compared to 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 black line is the aggregate of these two. When it is rising, inflation fears dominate, and when it is falling, deflation fears dominate.]


The charts above show that deflation fears have made headway against inflation worries over the past few weeks. That being said, deflation fears have not yet reached extreme levels (according to the second chart at least). On the timeframe that we consider when looking at these charts, it is no longer contrarian to be insuring against deflation (and/or underwriting the risk of inflation). However, the momentum towards a deflationary bias is by no means extended. As mentioned last week, the contrarian interpretation of the above charts has proven fruitful over the past couple of months. US government bonds have been a decent place to be and equities have been poor (especially when priced in gold).


Perhaps some of the contrarian asymmetry has been taken out of the deflation trade at this stage, but nevertheless it looks like it has some way to go.

See here for our collection of rare historical economic data.

Posted Jun 6, 2011