July Inflation Gauge rebounds

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31 July 2017

The Melbourne Institute’s Inflation Gauge is an attempt to replicate the ABS consumer price index (CPI) on a monthly basis instead of quarterly. It has turned out to be a reliable leading indicator of the CPI, although there are periods in which the Inflation Gauge series and the CPI have diverged, only for the two series to eventually converge over the space of six to twelve months.

During July, the Inflation Gauge increased by 0.10%, which is 2.70% higher than a year ago. Core measures of inflation, such as the Melbourne Institute’s version of “trimmed mean”, increased by 0.10% for the month or 2.30% on an annualised basis. This takes the core measure back into the RBA’s target range.

Although the gap between official and unofficial measures has expanded, a lot can happen between now and the next set of CPI figures which will be released in late October. However, as a leading indicator, one would expect official CPI figures to follow the Melbourne Institute measure. Readers will note from the chart above how the Inflation Gauge can reverse course in the short term and one should not read too much into any one month’s numbers.

On the day, 3 year yields lost 2bps to 1.95% while 10 year yields slipped 1bp from 2.69% to 2.68%. The local currency finished slightly higher at around 80 U.S. cents.