Inflation Gauge up 0.2% in October; annual rate now above 3%

Summary: Melbourne Institute Inflation Gauge index up 0.2% in October; index up 3.1% on annual basis; bond yields dive, partially reverse previous week’s rises.

Despite the RBA’s desire for a higher inflation rate, ostensibly to combat recessions, attempts to accelerate inflation through record-low interest rates failed in the second half of the previous decade. 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 and 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 0.2% in October. The rise follows a 0.3% increase in September and a flat result in August. On an annual basis, the index rose by 3.1%, accelerating from September’s comparable figure of 2.7%.

Commonwealth Government bond yields dived on the day, partially reversing large rises from the latter part of the previous week. By the close of business, the 3-year ACGB yield had lost 21bps to 1.19%, the 10-year yield had shed 19bps to 1.93% while the 20-year yield finished 18bps lower at 2.45%.

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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