EMU: HICP


Fri Jan 16 04:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.1% -0.1% -0.2%
Year over Year -0.2% -0.2% 0.3%

Highlights
Headline Eurozone inflation was unrevised in the final data for December. A 0.1 percent monthly drop in the HICP saw its annual rate drop from November's 0.3 percent to minus 0.2 percent, as previously indicated and the first sub-zero reading since October 2009.

However, the flash core rate that excludes food, alcohol, tobacco and energy was revised a tick lower to show a 0.7 percent yearly increase, in line with its November outturn and also matching the wider underlying measure that omits just unprocessed food and energy. Excluding seasonal food and energy the rate was again 0.7 percent, a tick higher than in mid-quarter.

Elsewhere in the HICP basket annual inflation in non-energy industrial goods was 0.0 percent after minus 0.1 percent in the previous month while the services rate was steady at 1.2 percent. Energy posted a 6.3 percent decline following November's 2.6 percent drop and food, alcohol and tobacco prices were flat after a 0.5 percent increase.

Confirmation of December's flash HICP outturn will leave the majority of speculators convinced that the ECB will adopt some form of QE next week. Thursday's discussions will take place with headline inflation in negative territory in some seven Eurozone member states, three of which (Greece, Spain and Cyprus) now show rates of below minus 1.0 percent.

Against this backdrop, pressure to do something will be intense. The biggest risk, of course, is that divisions within the Council over what constitutes the appropriate policy stance ultimately force the central bank to do nothing. However, in the light of recent economic developments, any package of measures will also need to be large enough to ensure that investors will give it the benefit of the doubt.

Definition
The harmonized index of consumer prices (HICP) is an internationally comparable measure of inflation calculated by each member of the European Union using a specific formula. Since January 1999, the European Central Bank has used the HICP as its target measure of inflation.

Description
The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.