The Melbourne Institute’s Inflation Gauge is an attempt to replicate the ABS consumer price index (CPI) on a monthly basis instead of quarterly. 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 periods of up to six to twelve months. On average, the Inflation Gauge’s annual rate tends to overestimate changes in the CPI inflation by about 0.09% in any given month.
The Inflation Gauge was unchanged during May after a 0.5% increase in April and a 0.1% increase in March. Compared to a year ago, the index is 2.1% higher, which is a modest increase from April’s comparable figure of 2.0%.
As a leading indicator, one would expect official CPI figures to follow the Melbourne Institute measure. However, the last two divergences have turned out to be “false starts” and the Inflation Gauge fell back to the official annual CPI figure at the start of 2018. The two measures have remained reasonably close to each since.