Inflation Worries Remain at Elevated Levels…

An update of the weekly ‘inflation vs deflation’ indicators for 20/6/11. Inflation worries remain at elevated levels and have even pulled back slightly over the past week.

 

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 chart

Click to enlarge. Source: Google Insights

inflation vs deflation indicator chart (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.]

 

After a flat week in most equity indices, commodities, bonds & currencies, we find that the ‘inflation vs deflation’ indicators have recovered a little bit. So, the interpretation remains broadly the same – that inflation fears have just come off extreme levels and that we may see about of extreme deflation fears. Given the range of these indicators (see above), it would seem that we’re quite far away from an environment of hysterical fears of deflation. Hence, if one insured against deflation during the manic inflation worries that we recently witnessed, then one might want to hold onto those insurances until these indicators start pointing strongly downwards.

 

I remain convinced that the contrarian asymmetry in insuring against deflation has diminished, but the momentum in the trade is far from overextended.

See here for our collection of rare historical economic data.

Posted Jun 20, 2011