Tue Feb 24 04:00:00 CST 2015

Consensus Actual Previous
Month over Month -1.6% -1.6% -0.1%
Year over Year -0.6% -0.6% -0.2%

The Eurozone's annual inflation rate was confirmed at the previously reported minus 0.6 percent in January, its second successive print below zero and its weakest posting since July 2009. Compared with December, the HICP declined 1.6 percent.

However, the narrowest measure of underlying inflation was revised a tick firmer. Hence, excluding food, alcohol, tobacco and energy prices are now put 0.6 percent higher on the year, only a 0.1 percentage point drop versus the final December outturn and matching the results for the HICP omitting just unprocessed food and energy. The third core gauge, which excludes seasonal food and energy, was running at just a 0.5 percent annual rate, a couple of ticks below its December mark.

Regionally Greece (minus 2.8 percent) remained at the bottom of the inflation ladder below Spain (minus 1.5 percent), Lithuania (minus 1.4 percent) and Luxembourg (minus 1.1 percent). Only Malta (0.8 percent) and Austria (0.5 percent) currently show annual rates above zero.

The minor positive revision to one of the underlying measures may provide some cheer for the ECB but the overall picture remains one of accumulating deflationary pressures. On Friday Germany will release its provisional CPI data for February. The January report was unexpectedly weak and set the tone for the region as a whole. The central bank for one will be hoping for no additional downside shocks.

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.

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.