I don't have a problem with Google keeping track of what pages link to other pages (via their crawling spider bots). After all, that's what basically makes it work. And to an extent, using your IP address to narrow down searches is probably OK too, since if I search for a plumber I probably want one here, and not in London.
If you think that Google is basically a search engine then you believe what Google wants you to believe. If Google would be only a search engine, then it would not be such a large and profitable company.
But once they start to remember what I searched for, and trying to build up a commercial profile of me, with a view to selling that to advertisers, then I think it steps over the line. Put it like this: today they sell to advertisers, tomorrow: political parties.
Now here we come to the core of the issue. Who do you think is paying Google for what? The point is that Google is a very successful marketing and marketing analytics company. The point is not that specifically your data matters. However since they collect whatever they can get they also collect data of really important people like politicians, top notch leaders as well as lesser influencers. This is where it gets really interesting.
With regard to your data it all boils down to: If a service is free you are the product.