A new monthly CPI: not before time

Plus, the US debt ceiling negotiations: this time is different

Treasurer Jim Chalmers takes questions from journalists at a post-Budget address to the National Press Club in the Great Hall of Parliament House. Photo credit: Stephen Kirchner.

Buried in Tuesday’s federal Budget papers was funding for the ABS to roll out a full monthly CPI, building on its existing monthly CPI indicator. This is a welcome and long overdue development. I first made the case for a monthly CPI in this op-ed in The Canberra Times in March 2010, which is another illustration of how long-run persistence in policy advocacy pays off. As I noted then, the existing quarterly CPI results in less timely monetary policy decisions, compounding the RBA’s inaction bias.

The quarterly frequency for Australia’s CPI puts it in an anomalous position internationally (along with NZ). Apart from potentially biasing the timing of monetary policy decisions, the low frequency CPI has implications for offshore participation in Australia’s inflation-indexed bond market. Most international investors are set-up for monthly, not quarterly, indexation of cash flows on inflation-linked bonds. The Australian bond market is not large enough to warrant investment in bespoke systems to index cash flows on a quarterly basis. This limits offshore participation in the local indexed bond market, reducing liquidity and the efficiency of price discovery in that market. It means that inflation-indexed bonds are not as informative as they could be, not least about the stance of monetary policy.