CH: Consumer Price Index

Wed Aug 05 02:15:00 CDT 2015

Consensus Actual Previous
M/M % change -0.4% -0.6% 0.1%
Y/Y % change -1.0% -1.3% -1.0%

Consumer prices were weaker than expected in July. A 0.6 percent monthly fall, the steepest July drop since 2011, saw the annual inflation rate slide from minus 1.0 percent in June to a new low of minus 1.3 percent.

The largest negative impact on the monthly change came from an 8.3 percent slump in alcohol and tobacco prices which alone subtracted more than 0.3 percentage points. However, most categories were soft, notably household equipment and maintenance (minus 1.4 percent), transport (minus 0.9 percent), and food non-alcoholic drink (minus 0.6 percent).

As a result, the core CPI, which excludes fresh food and energy, similarly posted a 0.6 percent monthly decrease, enough to reduce its annual rate to minus 0.6 percent, a couple of ticks short of its June mark.

Today's report warns that deflation risks might not even have stabilised yet and so is not good news for the SNB. Indeed, with Monday's disappointing July PMI (48.7) also casting doubt about the prospects for positive growth this quarter, some form of additional monetary easing from the central bank may yet be necessary before year-end.

The consumer price index measures the price of a basket of goods (commodities and services) which is assumed to represent the average consumption habits of private households. The consumer price index is thus a yardstick for the cost development of the goods consumed (price level). Although not a member of the Eurozone, a harmonized index of consumer prices (HICP), measured according to Eurostat's procedures is also published alongside the CPI.

The price level is the weighted average of various output prices in the economy. The price level measures the price of a defined basket of goods which is a cross-section of the goods produced or consumed in an economy (commodities and services). A stable price level does not necessarily imply stable unit prices: price rises for individual goods may be compensated by price reductions for other goods so that overall the price level remains constant. A rise in the price level implies a decline in the purchasing power of money: on average, a monetary unit will buy a smaller number of commodity units. Consequently, the price level and monetary value always exhibit opposite development.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. 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 loans to 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 CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.