CH: Consumer Price Index

Fri Jan 09 02:15:00 CST 2015

Consensus Actual Previous
M/M % change -0.3% -0.5% 0.0%
Y/Y % change -0.2% -0.3% -0.1%

Consumer prices were very weak in December. The CPI is seasonally soft at year-end but last month's 0.5 percent drop versus November was the steepest since July 2012 and sharp enough to reduce the annual inflation rate by 0.2 percentage points to minus 0.3 percent, its lowest reading since November 2013.

Compared with mid-quarter, prices were down in most categories but, predictably, the standout decline was in petrol which posted a 7.3 percent slump and alone subtracted nearly 0.3 percentage points from the monthly change in the headline index. There was also a 0.5 percent slide in food and non-alcoholic charges which meant that the core index, which excludes energy and unprocessed food, fell a relatively mild 0.2 percent on the month. Indeed, annual underlying inflation actually picked up a couple of ticks to 0.3 percent.

The acceleration in core inflation should be well received by the SNB but the central bank will still be concerned that the fall in the overall rate might prompt a further downgrading of household inflation expectations. In any event deflation worries have not been eased by today's data and the SNB can be expected to continue to defend its exchange rate target floor with the utmost vigour.

The consumer price index measures the price of a basket of goods (commodities and services) which is assumed to represent the average consumption habits of private households. The consumer price index is thus a yardstick for the cost development of the goods consumed (price level). Although not a member of the Eurozone, a harmonized index of consumer prices (HICP), measured according to Eurostat's procedures is also published alongside the CPI.

The price level is the weighted average of various output prices in the economy. The price level measures the price of a defined basket of goods which is a cross-section of the goods produced or consumed in an economy (commodities and services). A stable price level does not necessarily imply stable unit prices: price rises for individual goods may be compensated by price reductions for other goods so that overall the price level remains constant. A rise in the price level implies a decline in the purchasing power of money: on average, a monetary unit will buy a smaller number of commodity units. Consequently, the price level and monetary value always exhibit opposite development.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. 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 loans to 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 CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.