CH: Consumer Price Index

Tue Feb 10 02:15:00 CST 2015

Consensus Actual Previous
M/M % change -0.6% -0.4% -0.5%
Y/Y % change -0.6% -0.5% -0.3%

Consumer prices fell a smaller than expected 0.4 percent on the month at the start of the year. Even so, January's drop was much sharper than normal seasonal factors would dictate and annual inflation declined a couple of ticks to minus 0.5 percent, its weakest rate since May 2013.

Within the CPI basket monthly developments were mixed and a (largely seasonal) 8.1 percent slump in the cost of clothing and shoes contrasted markedly with a winter vacation-led 1.2 percent spike in restaurant and hotel charges. Inevitably, the steepest fall in prices was in the energy sector and petrol costs were down fully 7.3 percent versus December and some 19.1 percent compared with January 2014.

In fact, the underlying picture was actually slightly firmer than at year-end as the core index, which excludes fresh food and energy, posted a 0.4 percent monthly drop that saw its yearly rate edge up from 0.3 percent to 0.4 percent. However, the January data will only reflect a fraction of the overall impact of the CHF's dramatic appreciation this year and upcoming CPI and PPI reports are likely to be extremely soft. The SNB may be quietly relieved by today's figures but the real deflation news is waiting just around the corner.

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.