Summary: Melbourne Institute inflation index bounces after May plunge; annual rate increases but still below 1%; June quarter CPI may approach -1%.
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.” Since the GFC, Australia’s inflation rate has been trending lower and lower and it has been below the RBA’s target band for some years now.
The Melbourne Institute’s latest Inflation Gauge index jumped by 0.7% through June. The increase follows a 1.2% drop in May and a 0.1% decline in April. On an annual basis, the index increased by 0.7%, a sizable rebound from May’s comparable rate of just 0.1%.
The latest value of the index coincided with ANZ’s June Job Ads report and long-term Commonwealth bond yields moved modestly higher, ignoring lower US Treasury yields in overnight trading. By the end of the day, the 3-year ACGB yield remained unchanged at 0.30% while 10-year and 20-year yields both finished 2bps higher at 0.94% and 1.58% 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 an average of a little under 0.1%.
Given the Inflation Gauge’s tendency to overestimate, the latest figures imply an official headline CPI reading of 0.6% in annual terms or -0.9% for the June quarter. Regression analysis provides a slightly higher annual result of 0.8%. However, it is worth noting the annual CPI rate to the end of March was 2.2% while the inflation Gauge had implied a 1.4%-1.5% annual rate at the time.