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Is there a bubble in inflation expectations? In his latest research piece David Rosenberg posts an interesting tidbit – should we view John Q Public’s inflation expectations as a contrarian sign?  Mr. Rosenberg says:

“The chart below depicts…12 month inflation expectation by John and Jane Q Public.  Their forecasting record is a riot – it’s even worse than most economists.  But each time in the past that the Conference Board’s inflation expectation index either approached or crossed above the 6% mark, inflation actually fell in the ensuing year each time, and by an average of more than three-percentage points.  So when did this metric rise above 6% this time around?  Try March.  And what was headline inflation at the time?  Call it roughly 2.5%.  Do the math – think we may be talking about deflati0n again this time in 2012?”

Very interesting.  If there was ever something cyclical it is sentiment.  Parabolic sentiment charts are never a good sign.  If I could short this index I would place a virtual guarantee on my ability to make money in the coming 6 months.  Unfortunately, making money isn’t that simple.  But the chart certainly makes one wonder if there isn’t a bubble in inflation expectations due in large part to QE2 and seasonal trends in commodities?

Source: Gluskin Sheff


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