Mon Aug 31 04:00:00 CDT 2015

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

Eurozone inflation was provisionally unchanged at 0.2 percent in August, its third consecutive month at this level. The outcome was stronger than expected but still worryingly close to zero.

Tumbling oil prices were seen depressing the headline index and indeed, annual energy deflation steepened from minus 5.6 percent in the final July data to minus 7.1 percent. However, its impact was essentially negated by the rising cost of the other more volatile HICP components, notably alcohol, food and tobacco where the rate climbed from 0.9 percent to 1.2 percent. As a result, the key core rates were unchanged at 1.0 percent for the ex-alcohol, food, tobacco and energy measure and 0.9 percent for the ex-unprocessed food and energy gauge. Non-energy industrial goods inflation actually crept a tick higher to 0.6 percent while the rate in services was flat at 1.2 percent.

Coming just ahead of Thursday's Council meeting today's update will hardly put a smile on the ECB's face. Nonetheless, the August report is at least a little firmer than generally expected and the stability of the core measures should offer some reassurance about the underlying picture. That said, as last week's August ESI survey pointed out, the weakness of the headline rate already seems to be having a negative impact on inflation expectations and this could be problematic further out.

Little fresh is expected from the central bank's policy deliberations this week but it would be no surprise should President Draghi sound both more cautious and a little more dovish in his post-meeting press conference.

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.