Summary: Melbourne Institute Inflation Gauge index up 0.1% in September; up 2.6% on annual basis; ACGB yields jump; rate-cut expectations soften, February cut no longer fully priced in.
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 0.1% in September, in contrast with the 0.1% decline in August and less than July’s 0.4% increase. Inflation on an annual basis accelerated from 2.5% to 2.6%.
Commonwealth Government bond yields generally jumped on the day in a manner similar to the movements of US Treasury yields on Friday night. By the close of business, the 3-year ACGB yield had gained 20bps to 3.76%, the 10-year yield had added 14bps to 4.22% while the 20-year yield finished unchanged at 4.49%.
Expectations regarding rate cuts in the next twelve months softened, and a February 2025 rate cut is no longer fully priced in. Cash futures contracts implied an average of 4.315% in November, 4.275% in December and 4.19% in February 2025. However, September 2025 contracts implied 3.72%, 62bps less than the current cash rate.
Given the Inflation Gauge’s tendency to overestimate, the latest figures imply an official CPI reading of -0.1% (seasonally adjusted) for the September quarter or 2.5% in annual terms. However, it is worth noting the annual CPI rate to the end of March 2023 was 7.0% while the Inflation Gauge had implied a 5.7% annual rate at the time.