Australia has monthly inflation – Use it!
In looking for reasons why the RBA was slow to cut interest rates, a few analysts have popped up to suggest the misreading of the deceleration in inflation was the critical point. To that end, they suggest that Australia’s lack of an official monthly CPI was key in the RBA waiting and waiting before doing a two-for-the-price-of-one 50 basis point cut in May, a week after the quarterly CPI showed inflation in free-fall.
To be sure, the RBA did get the growth slow-down and with it the deceleration in inflation wrong. But the tardy interest rate response was not for want of monthly inflation data.
A decade or so ago, Professor Don Harding, Dr Lei Lei Song and I got together to see whether it was possible to produce a monthly inflation gauge for Australia. After some testing for sources of data, timeliness and cost, we thought we would go ahead and collect data on a near-to-as-possible methodology to the Australian Bureau of Statistics and see how it went for a couple of years.
This saw the birth of the TD-MI Monthly Inflation Gauge.
The early signs were encouraging. In broad terms, the annual rise in the monthly numbers we collected generally matched the official quarterly CPI. This was terrific news. Occasionally, when the result diverged for a quarter or so, it quickly corrected with the CPI reverting to the Monthly Inflation Gauge. This suggested we were getting the methodology broadly right although timing issues with price sampling may have accounted for the ABS getting slight and temporary differences to our numbers.
The point of all of this is to note the TD-MI Monthly Inflation Gauge has done a stunning good job in not only picking turning points in inflation, but also the orders of magnitude in the inflation rate for the past decade.
The eye-ball econometrics from the chart below shows very clearly that the correlation between the ABS quarterly CPI and the Monthly Inflation Gauge is better than strong.
In the most recent episode, the Monthly Inflation Gauge turned a little before the CPI and confirmed a sub-2% inflation rate well before the ABS printed the same result. See the thin blue line in the chart below (the Monthly Gauge) and the thicker green line (the ABS quarterly CPI).
Had the RBA and dare I say the market paid more attention to the Monthly Inflation Gauge, it might have had a clue that the cooling in inflation was occurring and was significant. As a result, it might have been happy to cut in February or March and avoided the requirement for the 50 point catch up in May.
The lesson of this episode is to watch the Inflation Gauge each month – it contains plenty of useful information on inflation.
Oh – and as a second “check” on just how reliable the Monthly Inflation Gauge is, look at the level of prices tracked by the Monthly Inflation Gauge versus the CPI. As you can see, after 10 years of data, the fit is like a finger in a glove.