EMU: HICP


Tue Mar 17 05:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.6% 0.6% -1.6%
Year over Year -0.3% -0.3% -0.6%

Highlights
Eurozone inflation was unrevised in the final data for February. A 0.6 percent monthly increase in the HICP boosted its yearly rate to minus 0.3 percent, as indicated in the flash report and three ticks higher than in the final January print.

However, the provisional core estimates were revised a little stronger. Hence excluding food, alcohol, tobacco and energy and omitting just unprocessed food and energy, prices are now put 0.7 percent higher on the year, a tick above both their flash February and final January levels but on par with their December readings. The third core index, which excludes seasonal food and energy, also edged 0.1 percentage point firmer versus its final January mark to 0.6 percent.

The HICP basket details revealed flat annual inflation in non-energy industrial goods (minus 0.1 percent) but stronger prices growth in services (1.2 percent after 1.0 percent). Food, alcohol and tobacco climbed 0.6 percentage points to a 0.5 percent yearly rate while energy rose from minus 9.3 percent to minus 7.9 percent.

The upward revision to underlying inflation is good news but little to get excited about at this stage. Several more months of accelerating prices will be needed before the ECB can really begin to feel confident that policy is working. Just last week the central bank lowered its 2015 inflation forecast from December's 0.7 percent rate to zero. This gives it room to accommodate any additional near-term price weakness while still adhering to its current QE programme. However, it will still be keeping a particularly close eye on private sector inflation expectations as renewed weakness here could seriously undermine its efforts to restore growth and meet its medium-term price stability targets.

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.