Summary: Melbourne Institute Inflation Gauge index up 0.4% in February; up 6.3% on annual basis; ACGB yields down; noticeably; rate rise 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 increased by 0.4% in February, following increases of 0.9% and 0.2% in January and December respectively. The index rose by 6.3% on an annual basis, down a touch from January’s figure of 6.4%.
Commonwealth Government bond yields decreased noticeably on the day following similar movements in US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had shed 9bps to 3.52% while 10-year and 20-year yields both finished 14bps lower at 3.77% and 4.08% respectively.
In the cash futures market, expectations regarding future rate rises softened slightly. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.32% to average 3.495% in March and then increase to an average of 3.865% through May. August 2023 contracts implied a 4.12% average cash rate while November 2023 contracts implied 4.155%.
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.”