Summary: Melbourne Institute Inflation Gauge index up 0.2% in August; up 6.1% on annual basis; ACGB yields up noticeably; rate-rise expectations soften slightly.
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 August, following increases of 0.8% and 0.1% in July and June respectively. The index rose by 6.1% on an annual basis, up from July’s comparable figure of 5.4%.
The figures came out on the same day as the latest ANZ-Indeed Job Ads survey and Commonwealth Government bond yields rose noticeably, somewhat outpacing overnight movements of US Treasury yields. By the close of business, the 3-year ACGB yield had gained 7bps to 3.79% while 10-year and 20-year yields both finished 9bps higher at 4.09% and 4.44% respectively.
In the cash futures market, expectations regarding further rate rises softened slightly. At the end of the day, contracts implied the cash rate would remain steady at the current rate of 4.07% through September, move up to 4.09% in October and then average 4.135% in November. February 2024 contracts implied a 4.155% average cash rate and May 2024 contracts implied 4.125%, around 6bps more than the current 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.”