Inflation Gauge annual rate exceeds 3% again in November

Summary: Melbourne Institute Inflation Gauge index up 0.3% in November; index up 3.1% on annual basis; bond yields fall modestly.

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%.

The Melbourne Institute’s latest reading of its Inflation Gauge index indicates consumer inflation increased by 0.3% in November. The rise follows a 0.2% increase in October and a 0.3% increase in September. On an annual basis, the index rose by 3.1%, the same rate as in October.

The reading was released on the same day as ANZ’s latest Job Ads report and Commonwealth Government bond yields fell modestly on the day, despite large falls overnight of their US counterparts. By the close of business, 3-year and 10-year ACGB yields had each shed 3bps to 1.05% and 1.59% respectively while the 20-year yield finished 2bps lower at 2.11%.

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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