EMU: HICP Flash


Tue Jun 30 04:00:00 CDT 2015

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

Highlights
Eurozone inflation provisionally dipped a tick to a 0.2 percent annual rate this month. The drop, which matched expectations, was the first since the rate bottomed in January after the oil price collapse.

Core prices essentially followed the yearly headline move with both the ex-food, alcohol, tobacco and energy and the ex-unprocessed food and energy rates also sliding 0.1 percentage points to 0.8 percent. The main downward pressure came from services, where inflation was off 0.3 percentage points at 1.0 percent, and energy, where the rate was minus 5.1 percent after minus 4.8 percent last time. Elsewhere, food, alcohol and tobacco held steady at 1.2 percent but non-energy industrial goods climbed a welcome 0.2 percentage points to 0.4 percent, still very soft but easily its highest mark so far this year.

June's flash HICP rate will hardly cheer the ECB but it could have been a lot weaker and it still constitutes the second highest level since November 2014. That said, another poor outturn in July would certainly set some alarm bells going.

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.