Melbourne Institute Inflation Gauge index up 0.1% in February; up 4.0% on annual basis; ACGB yields fall moderately; rate-cut expectations firm.
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%, or at least until recently.
The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer prices increased by just 0.1% in February, following rises of 0.3% and 1.0% in January and December respectively. The index rose by 4.0% on an annual basis, down from January’s comparable figure of 4.6%.
The update was released on the same day as ANZ’s latest Job Ads report and January dwelling approvals data and Commonwealth Government bond yields fell moderately on the day, lagging noticeable falls of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had lost 3bps to 3.68%, the 10-year yield had shed 4bps to 4.12% while the 20-year yield finished 2bps lower at 4.43%.
In the cash futures market, expectations regarding rate cuts later this year firmed. At the end of the day, contracts implied the cash rate would remain close to the current rate for the next few months and average 4.315% through March, 4.305% in April and 4.27% in May. However, August contracts implied 4.15%, November contracts implied 3.98% and February 2025 contracts 3.85%, 48bps less 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.”