Summary: Melbourne Institute inflation index up modestly in January; annual rate remains unchanged.
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 of 2020.
The Melbourne Institute’s latest reading of its Inflation Gauge index increased by a modest 0.2% in January. The rise follows increases of 0.5% and 0.3% in December and November respectively. On an annual basis, the index rose by 1.5%, the same rate as in December.
The figures were released on the same day as ANZ’s January Job Ads report and long-term Commonwealth bond yields increased modestly on the day, broadly in line with higher US Treasury yields at the close of trading on Friday night. By the close of business, 10-year and 20-year ACGB yields had each gained 2bps to 1.16% and 1.87% respectively. The 3-year yield remained unchanged at 0.18%.
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 recent obsession among central banks, including the RBA, to increase inflation.