Fri Oct 30 05:00:00 CDT 2015

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

Eurozone inflation provisionally accelerated again this month, albeit only just. At 0.0 percent, the annual flash rate was up from its final minus 0.1 percent print in September and in line with market expectations.

Still, at least the rebound in overall prices was mirrored in the core rates. Hence, excluding food, alcohol, tobacco and energy the yearly rate was a tick firmer at 1.0 percent and omitting just unprocessed food and energy the rate was 0.9 percent after 0.8 percent last time. Energy (minus 8.7 percent after minus 8.9 percent) provided a slight boost as did food, drink and tobacco (1.5 percent after 1.4 percent). Importantly, there were also small gains in non-energy industrial goods (0.4 percent from 0.3 percent) and services (1.3 percent from 1.2 percent).

The ECB will be more than a little relieved that inflation's dip back into negative territory last month proved to be only short-lived. It will also take some heart from the gentle increase in the core rates. Nonetheless, the pick-up in the headline still leaves the rate hopelessly short of its near-2 percent medium-term target and, more relevantly in the current environment, the underlying picture has really only been flat since July. To this end financial markets will continue to look for additional QE, and possibly a fresh cut in the deposit rate, in December.

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.