This article first appeared in The Edge Malaysia Weekly, on April 25 - May 1, 2016.

In financial markets, there is an adage: “you can’t trust Chinese data”. This is unfair to China — not because Chinese data is reliable, but because economic data from other countries is also unreliable. Data in the US and in Europe is being revised more often than in the past, and the revisions are generally larger than they were in the past.

What particularly matters for investors is that there is a bias to data revisions. Since 2010, inflation and growth numbers have usually been revised higher than originally reported. Indeed, the revisions are even more significant than that.

In recent years, data that was originally reported as weaker than expected has been revised to data that is stronger than originally expected. The revision process is reversing the way in which data should surprise investors.

The problem is that financial markets generally react to the initial data release, not to the revisions. This means that the world view of financial markets is founded on data that was weaker than reality. Economists and policymakers, however, use revised data and are therefore looking at a world that has been showing evidence of stronger growth.

When investors consider the future, their starting point is the prevailing market price — but that market price is built on fundamental foundations that are wrong. When economists consider the future, their starting point is economic data — the latest, revised data, which is more optimistic.

One area where this split is obvious is the issue of disinflation and deflation. It is often suggested that the US is on the brink of some kind of deflation episode. This idea seems to have originated in the performance of US inflation data between 2012 and 2014.

There was an extraordinary period when the initial data release for inflation was nearly always lower than expected. Prices consistently surprised on the downside, fostering the idea of economists being wrong in their US inflation forecasts.

In fact, it turns out that economists were not wrong in forecasting US inflation at all. Economists were right and the data was wrong. The revisions to US inflation data were consistently positive, and the reality was that inflation figures initially reported as being below expectations were actually back in line with expectations. The US deflation scare was built on dodgy data.

Investors and economists have split views of the world. Investors worry about growth and fret whether inflation will go up. Economists see relatively strong growth performance and laugh at the idea of a global deflation threat. The economists are right (of course), but that does not mean that markets are going to accept that in a hurry.

This split is now also evident in the US Federal Reserve and other central banks. Those policymakers who think markets are important are generally inclined to be cautious about tightening policy, or are in favour of easing.

Those policymakers who view their job as managing the real world economy are more inclined to tighten policy now. It is a battle between economists living in the real world and markets living in a more pessimistic illusion.

Paul Donovan is senior global economist at UBS Investment Bank. His latest book, The Truth About Inflation, was published by Routledge in April 2015.

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