Summary: Melbourne Institute Inflation Gauge index up 0.8% in July; up 5.4% on annual basis; ACGB yields down modestly; rate-rise expectations firm 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 0.8% in July, following increases of 0.1% and 0.9% in June and May respectively. The index rose by 5.4% on an annual basis, down from June’s comparable figure of 5.7%.
The figures came out on the same day as the latest private credit figures and Commonwealth Government bond yields fell modestly. By the close of business, the 3-year ACGB yield had lost 2bps to 3.86%, the 10-year yield had slipped 1bp to 4.06% while the 20-year yield finished unchanged at 4.36%.
In the cash futures market, expectations regarding further rate rises firmed a touch. At the end of the day, contracts implied the cash rate would rise from the current rate of 4.07% to average 4.135% in August and then to 4.175% in September. February 2024 contracts implied a 4.315% average cash rate and May 2024 contracts implied 4.31%, both around 24bps 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.”