With all the attention on US inflation at the moment, we got to wondering if this is just a Wall Street fixation or if there is more to it. Using Google Trends to analyze the number of US user queries that included the word “inflation”, we found the following:
- There is considerable seasonality, but domestic Google searches for “inflation” do not appear to be rising in 2019.
- In fact, average US “inflation” search volumes were 3.5% lower in Q1 2019 than the same period last year.
- April 2019 partial month readings are flat to April 2018.
- Google’s indexation of search query volumes puts current US user interest about “inflation” right in the middle of a channel that runs from 50 to 100 back to 2004. March, for example, was 77.
- US consumers’ peak inflation worries, as measured by Google Trends, were back in April 2008 and the trough occurred in August 2010. In terms of magnitude, there were twice as many searches for “inflation” in April 2008 as there were in August 2010.
You can see the Google Trends for “inflation” here: https://trends.google.com/trends/explore?date=all&geo=US&q=inflation
To backtest those peak and trough datapoints against actual economic data, we pulled the headline and core Consumer Price Index data back to 1958 (see chart below, email if you want the spreadsheet) and found:
- Just two months after peak Google inflation search interest (April 2008), headline CPI inflation (i.e. including food and energy) hit 5.5% in July 2008 (the highest reading since 1990, unequalled to today).
- The August 2010 low point for Google “inflation” searches lines up with a trough in core (ex food and energy) inflation, which bottomed in October 2010 at 0.6%. Worth remembering: that post-Great Recession core inflation print was the lowest number back to the late 1950s.
Our take: US consumers experience and respond to price inflation through both “headline” and “core” numbers. Lofty levels of headline inflation definitely get the public’s attention and Google searches spike. Quiescent core inflation put the whole issue on the backburner for many Americans, and Google searches decline.
That puts the Federal Reserve in a bit of a bind because they very much want to be judged by core, rather than headline, numbers but both clearly inform consumer inflation expectations. Yes, over the longer run headline/core do track each other (1957 – present average of 3.7% for each). And, just as importantly, the volatility of core inflation averages 66% of the headline numbers.
But things look different now, because while headline/core inflation look similar just now (March 2019 1.9%/2.0%), the volatility patterns have diverged:
- The volatility of headline inflation has been running right in line with its long-run average at 0.5 percentage points over the last 12 months versus its long-run average of 0.6 points.
- Core inflation (2.0% in March 2019), however, has become remarkably sticky.
The long-run (1958 – present) standard deviation is 0.4 percentage points, but since 2010 this has fallen to just 0.2 points and over the last 12 months it is just 0.1 points.
The upshot here: core inflation has remained anomalously steady and low since 2010 despite the Fed’s very best efforts. Absent an energy shock – the one catalytic event that has historically shifted headline/core inflation – the odds of a sudden hockey-stick move higher for inflation seem very low indeed. That might change later in the year if wage growth continues, but for right now the data betrays no signs core inflation is about to ramp higher.
The good news: low inflation volatility means low bond market volatility, and that feeds through to low equity market volatility. That is an underappreciated dynamic, but it is visible everywhere from the Google search data to 10-year Treasuries.