When people think of inflation, they tend to imagine a basic system that has two levers, supply and demand. What is the money supply and how does it affect the price of a good? If I introduce a trillion more dollars into the money supply, the value of each dollar drops, this logic goes, so prices on goods and services must rise to account for that delta.

This model ignores a fundamental mechanism of any market—to make predictions and anticipate shocks that will affect the price of a good. This means market participants will try to anticipate how macroeconomic shocks affect prices. So if a money supply shock has not yet hit a market, market participants aren’t just going to wait around. They are going to anticipate the hit and raise prices pre-emptively.

This is one way a classic money supply equation breaks down as a good way to model inflation. In the ‘real world’, inflation is determined not just by businesses’ supply costs or the how much money is in circulation, but also by the signals market participants give one another—which can be measured via social network and news channels.

Dotdat monitors inflation sentiment by collecting samples of the language used to discuss inflation in these forums — and using them to build models to predict future inflation. One of our measures of inflation sentiment (shown below) tracks frequency counts of collections of terms associated with inflation and economic uncertainty or market volatility in major news outlets. The grey line is our measure’s daily frequency count and the blue line the rolling 30-day mean of the daily measure.

As the figure shows, concerns about inflation surged with the onset of higher inflation in Q1 2021 and has remained elevated since then, recently spiking to new highs in April 2022 as the war in Ukraine and its impact on commodity price volatility and questions about Fed policy drove inflation uncertainty to even higher levels.

We’ll show in a follow-up post how powerful this measure can be as a predictor of inflation. The basic idea is if lots of folks are chattering amongst themselves about higher inflation and that chatter is making its way into news channels, then in response (and in anticipation of higher inflation) corporations will raise their prices, making the initial chatter about inflation a self-fulfilling prophecy.

When people talk about runaway inflation, this amplification via social signaling is their chief concern.