Fri Oct 16 04:00:00 CDT 2015

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

On the back of an expected 0.2 percent monthly rise, annual HICP inflation was confirmed at minus 0.1 percent in the final report for September. This was a couple of ticks short of August's final print and the first negative outcome since March.

However, as indicated in the flash data, the slide in the headline rate was essentially attributable to weakness in the more volatile components leaving the underlying picture largely unchanged from mid-quarter. Hence, excluding food, alcohol, tobacco and energy the yearly rate was 0.9 percent, matching its flash estimate and the final mid-quarter outturn. That said, the annual rates for both the HICP less just unprocessed food and energy and without only seasonal food and energy dipped a tick to 0.8 percent.

As previously reported yearly inflation in non-industrial goods slipped marginally (0.3 percent from 0.4 percent) but held stable in services (1.2 percent). Energy prices slumped 8.9 percent from a year ago after a 7.2 percent drop in August and food was up 0.8 percent following a 0.9 percent rise last time.

After allowing for the inevitable monthly volatility, today's data point to a broadly stable underlying inflation picture. This may be enough to keep the ECB on hold for the time being and if oil prices behave themselves, base effects should actually help to push the headline rate higher over coming months. Still, the bigger picture is one of persistently undershooting inflation and in such an environment, additional monetary easing in some shape or form must remain a very real possibility.

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 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.