CH: Consumer Price Index

Fri Sep 04 02:15:00 CDT 2015

Consensus Actual Previous
M/M % change -0.2% -0.2% -0.6%
Y/Y % change -1.4% -1.4% -1.3%

Consumer prices performed much as expected in August which means that inflation is still moving in the wrong direction. A 0.2 percent monthly fall left the CPI 1.4 percent below its level a year ago, its steepest annual decline in some sixty-five years.

Outside of food and non-alcoholic drinks (0.4 percent) and education (0.0 percent), all of the major subsectors posted monthly falls in prices with household equipment and maintenance (minus 0.5 percent) registering the sharpest move. Within energy, petrol prices were down 3.3 percent (minus 18.9 percent on the year) and alone accounted for half of the fall in the headline index. Nonetheless, a 0.1 percent dip in the core CPI which excludes energy and fresh food was enough to see its yearly rate slip from minus 0.6 percent to minus 0.7 percent.

The overall annual inflation rate has now been below zero for some ten consecutive months and prices have not risen on the year since August 2014. The real economy has recently surprised on the upside but even if total output is now on a rising trend, growth at best should be very sluggish for some time yet and provide minimal support for prices. Deflation pressures in Switzerland remain a major issue for SNB policy and, particularly should the local currency strengthen once more, interest rates could be lowered again 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.