Summary: Melbourne Institute Inflation Gauge index up 0.2% in December; up 5.9% on annual basis.
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 0.2% in December, following increases of 1.0% and 0.4% in November and October respectively. The index rose by 5.9% on an annual basis, unchanged from November’s figure.
Commonwealth Government bond yields barely moved on the day. By the close of business, 3-year and 10-year ACGB yields had both returned to their respective starting points at 3.24% and 3.61% while the 20-year yield finished 1bp lower at 3.97%.
In the cash futures market, expectations regarding future rate rises also hardly changed. Contracts implied the cash rate would rise from the current rate of 3.07% to average 3.22% in February and then increase to an average of 3.555% in May. August contracts implied a 3.73% average cash rate while November contracts implied 3.735%.
Given the Inflation Gauge’s tendency to slightly overestimate, the latest figures imply an official annual inflation reading of 5.8% (seasonally adjusted) in the December quarter. However, it is worth noting the annual CPI rate in recent quarters has been consistently well-above its Inflation Gauge equivalent. Regression analysis on a year-on-year basis suggests an official reading of 6.4%.