Summary: Melbourne Institute Inflation Gauge index up 0.4% in January; index up 3.0% on annual basis; bond yields fall, especially at short end; cash futures imply rate rise by June.
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%.
The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer inflation increased by 0.4% in January. The rise follows a 0.2% increase in December and a 0.3% increase in November. On an annual basis, the index rose by 3.0%, up from December’s 2.8%.
The reading was released on the same day as ANZ’s latest Job Ads report and Commonwealth Government bond yields fCommonwealth Government bond yields fell on the day, especially at the short end. By the close of business, the 3-year ACGB yield had shed 10bps to 1.37%, the 10-year yield had lost 4bps to 1.92% while the 20-year yield finished 5bps lower at 2.40%.
In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.05%, remained fairly soft until May. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until April 2022 and then rise to 0.29% by June. February 2023 contracts implied a cash rate of 1.26%.
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 relatively recent obsession among central banks, including the RBA, to increase inflation.