EMU: HICP


Wed Jun 17 04:00:00 CDT 2015

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

Highlights
The final report for May confirmed the fourth consecutive acceleration in inflation revealed in the flash data. A 0.2 percent monthly rise in the HICP was in line with market expectations and lifted annual inflation by 0.3 percentage points to 0.3 percent, equalling its strongest rate since October 2014.

As previously indicated the boost to the annual headline rate was broad-based. Hence, inflation in non-energy industrial goods picked up from 0.1 percent to 0.2 percent and in services from 1.0 percent to 1.3 percent. Food, alcohol and tobacco climbed from 1.0 percent to 1.2 percent and energy deflation eased a full percentage point to 4.8 percent.

Consequently, the acceleration in overall prices was largely matched in the core indices. Excluding food, alcohol, tobacco and energy the rate was confirmed at 0.9 percent, up 0.3 percentage points from April, while omitting only unprocessed food and energy the rate was unrevised at also 0.9 percent, or 0.2 percentage points higher than at the start of the quarter. Without seasonal food and energy the rate was 0.8 percent, a couple of ticks up from last time.

There are no surprises in the final HICP figures for May. For the ECB it is a case of so far, so good but there is a long way to go yet before the near-2 percent inflation target comes into sight. Indeed, some six Eurozone members still have prices falling on the year.

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.