3 Sentiment-based resources to master inflation

September 6, 2023

From nowcasting to building asset strategies, we explore the potential of sentiment analysis to better capture inflationary trends.

Highlights

In the aftermath of the pandemic, high inflation has been a persistent concern affecting even the most robust economies. While there are indications that inflation is gradually receding from its recent peaks, it continues to hover above target levels in many economies. As a result, investors and financial analysts are seeking innovative ways to enhance their understanding of inflationary trends on a day-to-day basis. Sentiment analysis has emerged as a powerful tool to refine inflation forecasting accuracy, offering a unique perspective that complements traditional economic indicators.

The conventional methods of tracking inflation have heavily relied on historical economic data such as consumer price indices or producer price indices. While these metrics provide valuable insights into inflation trends, they often come with a time lag, making it challenging for investors to swiftly respond to evolving market dynamics.

Compared to traditional economic indicators, sentiment tends to react faster to changes in the markets. When combined with other data sources, sentiment data can enhance the accuracy of inflation nowcasting models, and provide investors with timely insights to make informed decisions.

Here are three resources that leverage Sentiment to:

  • Enhance inflation nowcasting
  • Build an inflation-based asset allocation strategy
  • Hedge against inflation
1. Navigating Inflation Uncertainty

In this methodology blog post , we explain how sentiment can improve the timeliness and accuracy of inflation nowcasts. You can also review the monthly results of our nowcast.

2. Inflation Based Strategy
Using Sentiment Data to Build an Inflation-based Allocation Strategy

We show how to build an inflation-based asset allocation strategy using sentiment data, and demonstrate that sentiment-based strategies outperform models that depend merely on past observed inflation values.

3. Hedging Inflation Risk
A Nowcast Approach Under Risk Target Constraints

Sentiment-augmented nowcasts also perform well when you operate under risk constraints. Check out this multi-asset allocation strategy which outperforms the S&P 500, and stabilizes volatility with a risk control approach and real Sharpe ratios of up to 1.25.

Access daily predictions of month-over-month US Core and Headline inflation rates , powered by news and macro indicators at ravenpack.com/inflation .



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