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Mere Correlation or Just an Coincidence?

080913correlationDon't they look similar?  The top graph is inflation expectation which replicates Krugman's post.  The bottom graph is the chances that Obama will get elected from Intrade.  Does incoming Republican administration correlate with deflation?  If so, why?

1) Does economy affect politics?  This interpretation is problematic.  Does deflation prospect favor the incumbent party?  That is against empirics.

2) Does politics affect economy?  If new GOP administration is not effective, the market forecasts deflation.  It makes some sense, doesn't it?  Fed influences price changes.  Current head of FRB is intervening much the financial system.  Market perhaps expects the new Republican administration to restrict FRB's hand, by appointing hawks at vacant governor positions.

080914obama

OK, here is a more friendly chart.  It turns out that the correlation is positive but weak.  But, I still hope that they say something slightly meaningful.

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