Central banks around the world are fretting. Not because inflation is out of control and affecting investment decisions and eroding people’s savings as it did during the 1970s and 1980s. Rather the central banks are fretting because they want more of it. Bizarre as this may sound, central bankers think a modest amount of inflation is a good thing. Indebted governments also like inflation as it erodes the value of government debt. This is the opposite for savers who see inflation diminishing their real (after inflation) returns. As one person’s liability is another person’s asset, inflation shifts value from one party to another.
One private measure of inflation, the Melbourne Institute Inflation Gauge, is recorded monthly and the latest reading for September indicates consumer prices rose by 0.4% for the month and 1.3% year on year. Readers will see from the chart below how the Inflation Gauge is an excellent proxy for official CPI figures produced by the Australian Bureau of Statistics. Consumer inflation over the last five years has been edging down quite consistently and this latest figure, while not low on a monthly basis, is far away from marking the end of this trend. Economists and the RBA will require a few more months of figures above 0.2% before they gain confidence inflation has risen back to the RBA’s 2% to 3% target band.