Thu Jul 16 04:00:00 CDT 2015

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

The final HICP data for June confirmed the first deceleration in the Eurozone annual inflation rate since it hit a low of minus 0.6 percent in January. An unchanged index on the month was in line with expectations and put the yearly rate at 0.2 percent, a tick lower than its final May outturn.

Underlying developments were also as indicated in the flash report. Hence, excluding food, alcohol, tobacco and energy prices were running at a 0.8 percent annual rate versus 0.9 percent in mid-quarter, a fall matched by the ex-unprocessed food and energy measure. Omitting just seasonal food and energy the rate dipped from 0.8 percent to 0.7 percent.

There is little fresh news here. The ECB may be disappointed that the upward trend in inflation has, at least temporarily, come to an end but deflation concerns are nothing like as significant as they were just a few months ago. That said, with inflation worryingly close to zero and the Eurozone economic recovery still struggling to gain momentum, the central bank has a lot more work to do yet.

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 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.