Melbourne Institute Inflation Gauge index up 0.3% in January; up 4.6% on annual basis; ACGB yields rise sharply; rate-cut 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%, or at least until recently.
The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer prices increased by 0.3% in January, following rises of 1.0% and 0.3% in December and November respectively. The index rose by 4.6% on an annual basis, down from December’s comparable figure of 5.2%.
Commonwealth Government bond yields rose sharply on the day following similar movements of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yields had gained 13bps to 3.65%, the 10-year yield had added 12bps to 4.11% while the 20-year yield finished 10bps higher at 4.41%.
In the cash futures market, expectations regarding rate cuts later this year softened. At the end of the day, contracts implied the cash rate would remain close to the current rate for the next few months and average 4.305% through March, 4.285% in April and 4.25% in May. However, August contracts implied a 4.095% average cash rate while November contracts implied 3.90%, 43bps less 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.”