Thu Feb 19 01:45:00 CST 2015

Consensus Actual Previous
Month over Month -0.9% -1.0% 0.1%
Year over Year -0.3% -0.4% 0.1%

Inflation fell below zero in January for the first time in more than five years. A slightly steeper than expected 1.0 percent fall in the CPI versus December saw the annual rate slide from 0.1 percent to minus 0.4 percent, its weakest print since July 2009.

The HICP was even softer and registered a 1.1 percent monthly decrease to reduce its yearly change by also 0.5 percentage points to minus 0.4 percent.

Seasonal factors are strongly negative in January but the latest drop was dominated by the tumble in oil costs which, down fully 6.0 percent on the month, drove overall energy prices 2.1 percent below their level at year-end. In fact, seasonally adjusted the core CPI was just flat on the month and, at 0.2 percent, its yearly rate was actually up 0.3 percentage points compared with the previous period's outturn.

Still, underlying trends remain soft in line with sluggish domestic demand. Indeed, clothing and footwear charges, while always weak at the start of each year, slumped some 16.5 percent on the month. The national central bank has forecast a 0.4 percent rise in real GDP this quarter but although falling prices will certainly give a boost to real incomes it remains to be seen whether or not consumers will feel confident enough to go out and spend their windfall.

The consumer price index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI represent the main rates of inflation. The national CPI is released alongside the HICP, Eurostat's harmonized measure of consumer prices.

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. In countries where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. As a member of the European Monetary Union, France's interest rates are set by the European Central Bank.

France like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). The HICP is calculated to give a comparable inflation measure for the EMU. Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies.

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. 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.