Summary: Melbourne Institute inflation index slips in October; annual rate down to 1.1%.
Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates have failed to date. The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Since the GFC, Australia’s inflation rate has been trending lower and lower; the “coronavirus recession” then crushed it in the June quarter.
The Melbourne Institute’s latest Inflation Gauge index slipped 0.1% in October. The decline follows 0.1% rises in September and August and a 0.9% jump in July. On an annual basis, the index rose by 1.1%, down from 1.3%.
The figures came out on the same day as ANZ’s October Job Ads report and September housing finance approvals. Commonwealth bond yields moved lower, ignoring higher US Treasury yields at the close of trading on Friday night. By the end of the day, the 3-year ACGB yield had lost 2bps to 0.15%, the 10-year yield had shed 5bps to 0.78% while the 20-year yield finished 4bps lower at 1.40%.
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 headline rate by an average of a little under 0.1%.
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.” Hence the obsession among central bankers to increase inflation.