Tue Jun 02 04:00:00 CDT 2015

Consensus Actual Previous
Year over Year 0.2% 0.3% 0.0%

Eurozone inflation finally moved back into positive territory last month. A flash 0.3 percent annual rate was slightly stronger than market expectations and equalled the highest reading since October 2014.

Moreover, May's provisional acceleration largely reflected stronger performances by the less volatile subsectors. Hence, excluding energy, food, alcohol and tobacco, the yearly rate was 0.9 percent, some 0.3 percentage points above its final April print, while omitting just energy and unprocessed foods, inflation was also 0.9 percent and 0.2 percentage points firmer than last time.

Prices of non-Industrial goods were 0.3 percent higher on the year after a 0.1 percent increase in April while services saw a 1.3 percent gain following 1.0 percent previously. Food, alcohol and tobacco inflation was 1.2 percent, a couple of ticks firmer, and energy advanced 0.8 percentage points to minus 5.0 percent.

The broad-based pick-up in prices growth should go down very well at the ECB. Having hit a low of 0.6 percent in January, headline inflation has now risen for four consecutive months. Progress on underlying prices has been less marked but having been as low as 0.6 percent just a month ago, May's gain should still come as a major relief.

That said, business surveys continue to highlight a lack of pricing power and it remains to be seen whether the recent recovery in HICP inflation can actually stick, let alone advance further towards its still distant near-2 percent medium-term target. There is nothing here to justify any tapering of the ECB's QE programme.

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.