Melbourne Institute Inflation Gauge index up 1.0% in December; up 5.2% on annual basis; short-term ACGB yields fall, longer-terms steady/up modestly; rate-cut 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 jumped by 1.0% in December, following a 0.3% rise in November and a 0.1% decline in October. The index rose by 5.2% on an annual basis, up from November’s comparable figure of 4.4%.
Short-term Commonwealth Government bond yields fell on the day while long-term yields were either steady or modestly higher, somewhat similar to movements of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yields had lost 2bps to 3.63%, the 10-year yield had returned to its starting point at 4.09% while the 20-year yield finished 3bps higher at 4.43%.
In the cash futures market, expectations regarding rate cuts later this year softened slightly. At the end of the day, contracts implied the cash rate would remain close to the current rate of 4.32% and average 4.32% through February, 4.31% in March and 4.295% in April. August contracts implied a 4.07% average cash rate while November contracts implied 3.88%, 44bps less than the current rate.
Given the Inflation Gauge’s tendency to overestimate, the latest figures imply an official CPI reading of 1.8% (seasonally adjusted) for the December quarter or 5.1% in annual terms. However, it is worth noting the annual CPI rate to the end of March was 7.0% while the Inflation Gauge had implied a 5.7% annual rate at the time.