Summary: Melbourne Institute Inflation Gauge index rises by 0.5% in July; index up 2.6% on annual basis; bond yields unchanged at end of day.
Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates have failed to date. The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Australia’s inflation rate has been trending lower and lower since the GFC and the “coronavirus recession” then crushed it in the June quarter of 2020.
The Melbourne Institute’s latest reading of its Inflation Gauge index increased by 0.5% in July. The rise follows a 0.4% rise in June and a 0.2% decline in May. On an annual basis, the index rose by 2.6%, slowing from June’s comparable figure of 3.0%.
The figures were released on the same day as ANZ’s latest Job Ads report but Commonwealth Government bond yields remained remarkably stable on the day. By the close of business, 3-year, 10-year and 20-year ACGB yields had all returned to their starting points at 0.28%, 1.18% and 1.81% respectively.
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 headline rate by around 0.1% on average.
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.