Summary: Melbourne Institute Inflation Gauge index up 0.1% in April; up 3.7% on annual basis; ACGB yields fall; rate-cut expectations sending mixed messages..
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 just 0.1% in April, the same rate as in March and in contrast with February’s 0.1% fall. The index rose by 3.7% on an annual basis, down slightly from March’s comparable figure of 3.8%.
The update was released on the same day as ANZ’s latest Job Ads report and Commonwealth Government bond yields declined again, although not quite as much as the falls of US Treasury yields on Friday night (AEST) and with not much movement at the short end.. By the close of business, the 3-year ACGB yield had slipped 1bp to 4.02% while 10-year and 20-year yields both finished 4bps lower at 4.39% and 4.69% respectively.
In the cash futures market, expectations regarding the cash rate changes over the next 12 months continued to send mixed messages. 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 4.335% through May and 4.35% in June. However, November contracts implied a 4.42% average cash rate, February contracts implied 4.325%, while May 2025 contracts implied 4.22%.
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.”