Summary: Melbourne Institute Inflation Gauge index up 0.9% in January; up 6.4% on annual basis.
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 0.9% in January, following increases of 0.2% and 1.0% in December and November respectively. The index rose by 6.4% on an annual basis, up from December’s figure of 5.9%.
Commonwealth Government bond yields increased noticeably on the day following large movements in US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had gained 9bps to 3.10%, the 10-year yield had added 8bps to 3.47% while the 20-year yield finished 5bps higher at 3.87%.
In the cash futures market, expectations regarding future rate rises also hardly changed. Contracts implied the cash rate would rise from the current rate of 3.07% to average 3.25% in February and then increase to an average of 3.62% in May. August contracts implied a 3.72% average cash rate while November contracts implied 3.655%.
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.”