EMU: HICP Flash


Tue Mar 31 04:00:00 CDT 2015

Consensus Actual Previous
Year over Year -0.1% -0.1% -0.3%

Highlights
Eurozone inflation provisionally accelerated for a second month in a row in March. At minus 0.1 percent the flash annual rate was up 0.2 percentage points versus its final January print, in line with expectations and at its highest mark since last November.

Inevitably the increase in overall prices was largely fashioned by higher energy charges and the yearly rate here jumped from minus 7.9 percent to minus 5.8 percent. Significantly, elsewhere changes were much less dramatic and, indeed, excluding food, alcohol, tobacco and energy as well as omitting just unprocessed food and energy the rate actually dipped a tick to 0.6 percent.

Amongst the other major sectors annual inflation fell 0.2 percentage points to 1.0 percent in services and held steady at minus 0.1 percent in non-energy industrial goods. Food, alcohol and tobacco edged up from 0.5 percent to 0.6 percent.

With the current QE programme slated to run through at least September next year, signs that both growth and (at least headline) inflation are at last starting to move in the right direction could mean that the next few ECB meetings become near non-events for financial markets. That said, previous economic recoveries have petered out disappointingly early, core inflation apparently fell this month and the outlook for oil prices is unpredictable to say the latest. Nothing should be taken for granted at this stage.

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. The early, or flash, estimate based on incomplete data is released about two weeks before the detailed release. This contains only a limited breakdown but still provides some early insights into underlying developments.

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.