EMU: HICP


Wed Sep 16 04:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.0% 0.0% -0.6%
Year over Year 0.2% 0.1% 0.2%

Highlights
Eurozone inflation was revised a tick lower to an annual rate of 0.1 percent in the final report for August, its weakest reading since April. However, an unchanged HICP on the month was in line with market expectations and at least means that its yearly change has been above zero for four consecutive months.

Developments in core inflation were mixed. Unhappily for the ECB, the annual flash rate for the HICP excluding food, alcohol, tobacco and energy was also nudged down 0.1 percentage points to 0.9 percent and so wiped out half of the increase seen in July. However, the HICP without just unprocessed food and energy was unrevised at 0.9 percent, matching its July outturn, and at also 0.9 percent, excluding only seasonal food and energy the rate was actually up a tick from July.

As previously indicated, the main downward pressure on the change in the annual rate came from energy where prices were down 7.2 percent on the year after a 5.5 percent drop in July. However, this impact was essentially offset by a jump in inflation in the food, alcohol and tobacco subsector to 1.3 percent from 0.9 percent. The non-energy industrial goods rate was steady at 0.4 percent and services flat at 1.2 percent.

Regionally performances were quite diverse. Hence, while Germany (0.1 percent) saw no change in its rate, France (also 0.1 percent) and Spain (minus 0.5 percent) were off one and five ticks respectively and Italy (0.4 percent) was 0.1 percentage points firmer. Bottom of the pile was Cyprus (minus 1.9 percent) while Malta (1.4 percent) was at the top.

There is little to please the ECB in today's minor revisions. The bottom line is that Eurozone inflation is still too low and underlying trends are probably only flat. Indeed, headline prices in some seven EMU countries remain below their level a year ago. A boost to the central bank's QE programme could well be waiting in the wings.

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.