Summary: Melbourne Institute Inflation Gauge index down 0.1% in October; up 5.1% on annual basis; short-term ACGB yields slip, longer-term yields barely move; rate-rise expectations soften slightly.
The Melbourne Institute’s Inflation Gauge is an attempt to replicate the ABS consumer price index (CPI) on a monthly basis. It has turned out to be a reliable leading indicator of the CPI, although there are periods in which the Inflation Gauge and the CPI have diverged for as long as twelve months. On average, the Inflation Gauge’s annual rate tends to overestimate the ABS rate by around 0.1%, at least until recently.
The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer prices declined by 0.1% in October, following increases of 0.0% and 0.2% in September and August respectively. The index rose by 5.1% on an annual basis, down from September’s comparable figure of 5.7%.
Short-term Commonwealth Government bond yields slipped a touch while longer-term yields barely moved on the day, ignoring overnight falls of US Treasury yields. By the close of business, the 3-year ACGB yield had ticked down 1bp to 4.209%, the 10-year yield had returned to its starting point at 4.74% while the 20-year yield finished 2bps higher at 5.06%.
In the cash futures market, expectations regarding further rate rises softened slightly. At the end of the day, contracts implied the cash rate would increase from the current rate of 4.07% and average 4.195% through November, 4.275% in December and 4.355% in February. May 2024 contracts implied a 4.45% average cash rate while August 2024 contracts implied 4.44%, 37bps more than the current rate.
Central bankers desire a certain level of inflation which is “sufficiently low that it does not materially distort economic decisions in the community” but high enough so it does not constrain “a central bank’s ability to combat recessions.”