Wed Sep 30 04:00:00 CDT 2015

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

HICP inflation provisionally fell again in September. At minus 0.1 percent, the flash estimate of the annual rate was softer than expected and down 0.2 percentage points from its final August print. The new reading also equalled its weakest mark since February and was the first sub-zero outturn in six months.

However, the deceleration in the headline rate was wholly due to the more erratic components and underlying inflation was unchanged at 0.9 percent for both the HICP excluding food, alcohol, tobacco and energy and omitting just unprocessed food and energy. Rather, the main downside pressure came, once again, from the energy sector where prices slumped 8.9 percent on the year after a 7.2 percent drop in August. Non-energy industrial goods inflation dipped a tick to 0.3 percent but prices in services accelerated by an equivalent amount to a 1.3 percent rate. Food, alcohol and tobacco inflation was also just 0.1 percentage points firmer at 1.4 percent.

The ECB can take some heart from the stability of the underlying inflation picture and will not be particularly surprised by the resumed decline in the headline rate. Nonetheless, the risk remains that a sustained negative total inflation rate will prompt a renewed downgrading of inflation expectations which would make attainment of the central bank's price stability goals all the more difficult.

As such, today's report should help to underpin speculation about an increase in the ECB's asset purchase programme at some point over the coming months.

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.