Australia - October TD-Melbourne Institute Inflation Gauge

The Melbourne Institute Inflation Gauge was flat in October following a 0.3%mth rise in September. The annual pace eased a touch to 1.8%yr from 13.9%yr in September but remains faster than the recent low of 1.3% in February. The pace remains well under the recent peak of 3.0%yr in June 2014.

Since its inception the level of the Gauge has appeared to accelerate head of the CPI then pause to let the CPI 'catch up'.  As such, the Gauge was tended to shy away from using as a guide to the CPI.

But something changed in 2014 and for the last four quarters the average quarterly change in the Gauge has been spot on to the quarterly change in the CPI. To two decimal places the CPI/The Gauge prints have been, 0.19%/0.20% Q42014, 0.19%/0.16% Q12015, 0.66%/0.70% Q22015 and 0.47%/0.53% Q32015.

"The Gauge is now closely watched for a lead on the Q4 CPI. For now the estimate of centred three quarter average change in the Gauge is 0.40% with one more month to go. The Gauge is pointing to another very modest print in Q4", says Westpac.

The trimmed mean of the Gauge was unchanged in October, following a rise of 0.2% in September. The trimmed mean rose by 0.4% over the three months to October, following a similar rise for the three months to September. In the year to October, the trimmed mean rose by 1.7%.

Contributing to the overall change in October were price rises for tobacco (+1.3%), newspaper, books & stationery (+3.0%), utilities (+1.3%). Offsetting were price falls in fruit & vegetables (-1.1%), holiday travel & accommodation (-1.5%), and bread & cereal products (-1.1%). The price of automotive fuel was reported to have eased slightly in October.

The net balance (number of price rises less number of price falls) as a good way to gauge the breadth of price pressure. The net balance was -7 in October for a three month average of 0.0 compared to an average of 6 for the previous six months, 13.0 in 2014 and a history average of 9.8. The June net balance suggests price pressures may be almost non-existent in Q4.

As noted the mid-month of the quarter is the best point of reference to compare the Gauge to the CPI. November is the mid months of Q4 so still there is a month to wait to get a full reading. But for now, the Gauge is currently up 0.4%qtr.

"Post the Q2 CPI Westpac's preliminary estimate for the Q4 CPI forecast was for a 0.4%qtr rise in the headline measure. All the components are yet to be finalised, in particular just how much pass through should be allowed for the recent weakness in the AUD. Given that the net balance has fallen again, we are not expecting to see too much pass through in Q4", added Westpac.  

For now, 0.4%qtr forecast looks comfortable, for Q4 CPI, the November Inflation Gauge is closely watched as part of the information process.