Deflation Fears Begin to Spike Higher..

Apologies for missing last week’s update and for the delay in publishing new content on the main page (we’ve been busy with our monthly newsletter). Here, I present an update of the weekly inflation vs deflation google insights chart for 15/8/11. It looks like we’re at the beginning of a spike in deflation fears (relative to inflation worries).


The chart below is intended to demonstrate the prevailing sentiment in the never-ending inflation vs. deflation debate. The indicator below uses search indices (courtesy of google insights) to gauge the degree to which people are searching for ‘inflation‘ compared to ‘deflation‘. When people are searching more frantically for the term ‘inflation’ than for the term ‘deflation’, it is assumed that inflation fears dominate. Conversely, when people are searching more frantically for the term ‘deflation’ than for the term ‘inflation’, it is assumed that deflation fears dominate. The contrarian market participant can use the chart below to oppose ‘inflation trades’ when inflation worries are at extremes, and conversely to oppose ‘deflation trades’ when deflation fears are at extremes.


inflation vs deflation indicator chart (relative outperformance)

Inflation Vs Deflation Indicator - Click to enlarge. Source: Google Insights


As mentioned in previous updates:


The chart above uses data that shows the relative outperformance/underperformance of the ‘inflation’ and ‘deflation’ search queries relative to searches in the entire ‘finance & insurance’ category of the web. So, regardless of the quantitive change in overall searches in the finance & insurance category, these indicators show if there are proportionally more or less searches for ‘inflation’ and ‘deflation’In this way, we can estimate the degree to which the finance proportion of the internet community is worried about inflation compared to deflation.


[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.]


Hurrah! Something is happening with this indicator! After months of patiently noting the contrarian asymmetry in insuring against deflation (and possibly underwriting the risk of inflation), it seems that the tables are finally starting to turn. The latest data point shows that the black line is plunging lower, and that therefore relatively more people are starting to grapple with notion of ‘deflation’ (compared  to inflation).


It must be said that we’re in no man’s land at this particular point in time. The contrarian asymmetry in insuring against deflation (and possibly underwriting the prospect of inflation) has well and truly gone. Now, it’s a matter of waiting to see how this indicator progresses; if it were to proceed lower, we will have to start thinking about opportunities on the reverse side (i.e. insuring against inflation and possibly underwriting the risk of deflation). As can be seen from the chart above, we’re a long way off outragously extreme worries about deflation. Perhaps I should say that it’s time to get emotionally prepared to insure against inflation. Right now, this indicator is yet to reach a level that is suitable for action. Feel free to subscribe or ‘follow’ us if you’d like to keep updated with these indicators over the coming weeks and months (see the top right of the page).

See here for our collection of rare historical economic data.

Posted Aug 15, 2011