Melbourne Institute Inflation Gauge index up 0.3% in November; up 4.4% on annual basis; ACGB yields fall; rate-rise expectations soften.
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 increased by 0.3% in November, following a 0.1% decline in October and a flat result in September. The index rose by 4.4% on an annual basis, down from October’s comparable figure of 5.1%.
Commonwealth Government bond yields fell on the day, dragged down by large falls of US Treasury yields on Friday night. By the close of business, 3-year and 10-year ACGB yields had both lost 4bps to 4.04% and 4.46% respectively while the 20-year yield finished 5bps lower at 4.75%.
In the cash futures market, expectations regarding further rate rises softened. At the end of the day, contracts implied the cash rate would remain close to the current rate of 4.32% and average 4.33% through December and January but then average 4.385% in February. May 2024 contracts implied a 4.40% average cash rate while August 2024 contracts implied 4.33%, just 1bp 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.”