EMU: HICP


Tue May 19 04:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.2% 0.2% 1.1%
Year over Year 0.0% 0.0% -0.1%

Highlights
There were no revisions to the headline flash April HICP data in the final report. A 0.2 percent monthly rise in prices matched expectations and saw the annual inflation rate climb from minus 0.1 percent in March to zero, its highest mark since November 2014 and its third acceleration in a row.

The underlying picture was similarly much as indicated previously. Hence, the yearly rise in prices excluding food, alcohol, tobacco and energy was confirmed at 0.6 percent although the HICP omitting just unprocessed food and energy was revised a tick firmer to 0.7 percent, also 0.1 percentage points above its final March outturn. Without just seasonal food and energy the rate was 0.6 percent, in line with the previous period's print.

Regionally most countries recorded little monthly change in their annual inflation rates although Cyprus (minus 1.7 percent after minus 1.4 percent) registered a relatively sharp decline and now stands just a tick above Greece. At the same time, Malta posted a disproportionately large 0.9 percentage point jump to 1.4 percent and now occupies the top rung of the Eurozone inflation ladder.

There is little for financial markets to get excited about in today's report. For the ECB the good news is that headline inflation is no longer below zero and core inflation appears to be stabilising. The not so good news is that both rates are still uncomfortably short of the 2 percent mark.

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.