Inflation Gauge up 0.3% in September

Summary: Melbourne Institute Inflation Gauge index up 0.3% in September; index up 2.7% on annual basis; bond yields little changed 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, initially aided by what economists call “base effects”.  The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer inflation increased by 0.3% in September. The rise follows a flat result in August and a 0.5% increase in July. On an annual basis, the index rose by 2.7%, accelerating from August’s comparable figure of 2.5%.

Commonwealth Government bond yields were little changed on the day. By the close of business, the 3-year ACGB yield had inched up 1bp to 0.51%, the 10-year yield had returned to its starting point at 1.52% while the 20-year yield had slipped 1bp to 2.14%.

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.

Given the Inflation Gauge’s tendency to overestimate, the latest figures imply an official CPI reading of 0.3% (seasonally adjusted) for the September quarter or 2.6% in annual terms. However, it is worth noting the annual CPI rate to the end of March 2019 was 1.3% when the Inflation Gauge had implied a 2.0% annual rate.

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