Inflation Fears Remain Prominent As the S&P 500 Bounces 5.5% in a Week…

An update of the weekly inflation vs deflation indicators for 4/7/11. As the S&P 500 posts a whopping 5.5% gain over the week, we find that inflation fears remain prominent (in comparison to deflation worries).

 

As explained in previous updates:

 

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'). We 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 the S&P 500 bounced 5.5% from oversold levels, we find that inflation fears remain elevated when compared with deflation worries. As mentioned in previous updates, deflation fears are far from being overstretched. By these indicators at least, we would first see a flurry of frantic searches for ‘deflation’ before concluding that deflation fears have become consensual (relative to worries about inflation). Although the contrarian asymmetry in adopting the ‘deflation trade’ could have come and gone, the momentum is by no means stretched on the downside.

See here for our collection of rare historical economic data.

Posted Jul 4, 2011