Inflation Gauge flat in August; up 2.5% over 12 months

Summary: Melbourne Institute Inflation Gauge index unchanged in August; index up 2.5% on annual basis; bond yields higher at end of day.

Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates have failed to date. The RBA’s stated objective is to achieve an inflation rate of between 2% and 3%, “on average, over time.” Australia’s inflation rate had been trending downwards at a modest rate after the GFC but the “coronavirus recession” then crushed it in the June quarter of 2020. Since then, the inflation rate has picked up, aided by what economists call “base effects”.  The Melbourne Institute’s latest reading of its Inflation Gauge index remained unchanged in August. The flat result follows a 0.5% rise in July and a 0.4% increase in June. On an annual basis, the index rose by 2.5%, slowing from July’s comparable figure of 2.6%.

The figures were released on the same day as ANZ’s latest Job Ads report and Commonwealth Government bond yields rose by increasing amounts along the curve on the day. By the close of business, the 3-year ACGB yield had inched up 1bp to 0.30%, the 10-year yield had added 3bps to 1.24% and the 20-year yield had gained 5bps to 1.89%.

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 headline rate by around 0.1% on average.

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.” Hence the relatively recent obsession among central banks, including the RBA, to increase inflation.

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