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

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Summary: The Melbourne Institute’s inflation gauge index rose 0.2% in October; index up 3.1% on an annual basis; bond yields plunge, partially offsetting the gains of the previous week.

Despite the The RBA’s Desire for a Higher Inflation Rateostensibly to fight recessions, attempts to accelerate inflation through record interest rates failed in the second half of the previous decade. The stated objective of the RBA is to achieve an inflation rate of between 2% and 3%, “on average, over time”. Australia’s inflation rate had trended downward at a modest pace after the GFC and the “coronavirus recession” and then crushed it during the June 2020 quarter. Since then, the rate of inflation picked up, initially aided by what economists call “base effects”. .

The Melbourne Institute’s latest reading of its inflation gauge shows that consumer inflation rose 0.2% in October. This increase follows a 0.3% increase in September and a stable result in August. On an annual basis, the index rose 3.1%, accelerating from September’s comparable figure of 2.7%.

Commonwealth government bond yields plunged that day, partially reversing the strong gains of the latter part of the previous week. At the close of business, the 3-year ACGB yield had lost 21bp to 1.19%, the 10-year yield had lost 19bp to 1.93% while the 20-year yield ended down 18bp at 2.45%.

The Melbourne Institute Inflation Gauge is an attempt to replicate the ABS Consumer Price Index (CPI) on a monthly basis. It has proven to be a reliable leading indicator of the CPI, although there are periods in which the inflation gauge and the CPI have diverged for twelve months. On average, the annual rate of the inflation gauge tends to overestimate the overall ABS rate by around 0.1% on average.

Central bankers want a certain level of inflation Which one is “low enough not to materially distort the economic decisions of the community“But high enough not to constrain”the ability of a central bank to fight recessions. “Hence the relatively recent obsession of central banks, including the RBA, with increasing inflation.

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