Thu Apr 30 04:00:00 CDT 2015

Consensus Actual Previous
Year over Year 0.0% 0.0% -0.1%

Eurozone inflation provisionally edged slightly firmer this month. At an annual rate of 0.0 percent April's reading was up only a tick from March but outside of negative territory for the first time since last November. The outcome was in line with expectations.

However, the acceleration in the headline rate was not mirrored in the underlying measures. Hence, excluding food, alcohol, tobacco and energy the HICP was up 0.6 percent on the year, only unchanged from its March posting. The same held true for the other core index that omits just unprocessed food and energy.

Non-energy industrial goods inflation crept 0.1 percentage points firmer to 0.1 percent but, ominously, services dipped another tick to 0.9 percent having already declined 0.2 percentage points in March. Elsewhere in the HICP basket energy deflation eased from 6.0 percent to 5.8 percent and food, alcohol and tobacco inflation climbed 0.3 percentage points to 0.9 percent.

Psychologically the removal of the minus on the overall HICP rate could be as important as anything else in helping to provide a boost to consumer inflation expectations. Even so, as the core measures make clear, not too much should be made of April's modest acceleration. Eurozone deflationary pressures do seem to have eased a little in recent months but a 2 percent annual HICP rate is still a long way off.

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.

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.