Summary: Melbourne Institute Inflation Gauge index up 0.5% in February; index up 3.5% on annual basis; bond yields fall sharply on day; cash futures imply no rate rise until after 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 0.5% in February. The rise follows a 0.4% increase in January and a 0.2% increase in December. On an annual basis, the index rose by 3.5%, up from January’s 3.0%.
Commonwealth Government bond yields fell sharply on the day as investors reassessed central banks’ plans in light of events relating to Ukraine and financial sanctions on Russia. By the close of business, the 3-year ACGB yield had shed 13bps to 1.58%, the 10-year yield had lost 9bps to 2.15% while the 20-year yield finished 11bps lower at 2.55%.
In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.05%, remained fairly soft for the next few months. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until June and then rise to 0.40% by August. February 2023 contracts implied a cash rate of 1.305%.
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.