Summary: Melbourne Institute Inflation Gauge index up 0.2% in April; up 6.1% on annual basis; ACGB yields up modestly; rate cut expectations soften.
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 0.2% in April, following increases of 0.3% and 0.4% in March and February respectively. The index rose by 6.1% on an annual basis, down from March’s figure of 5.7%.
The figures came out on the same day as ANZ’s latest Job Ads report and Commonwealth Government bond yields increased modestly on the day, ignoring movements in US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had inched up 1bp to 2.99%, the 10-year yield had added 2bps to 3.36% while the 20-year yield finished 3bp higher at 3.81%.
In the cash futures market, expectations regarding future rate cuts softened. At the end of the day, contracts implied the cash rate would rise from the current rate of 3.57% to average 3.59% in May and then increase to an average of 3.625% through June. August 2023 contracts implied a 3.695% average cash rate while May 2024 contracts implied 3.385%, about 18bps below the current cash rate.
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.”