EMU: HICP


Mon Nov 16 04:00:00 CST 2015

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

Highlights
Eurozone inflation was revised fractionally firmer in the final report for October. A 0.1 percent monthly increase in the HICP was in line with expectations but still enough to lift the zero percent yearly rate estimated in the flash data a tick higher to 0.1 percent. This was up 0.2 percentage points from its final September mark and so fully reversed that month's decline.

There was also some better news in the core measures. Hence, the annual rates of both the HICP excluding food, alcohol, tobacco and energy and omitting just unprocessed food and energy now show a 0.2 percentage point increase to 1.1 percent and 1.0 percent respectively. Moreover, the former recorded its strongest reading since December 2013. Equally promisingly, all the principal subsectors outside of processed food, alcohol and tobacco (flat), saw prices accelerate. The third underlying gauge which excludes only seasonal food and energy was a tick firmer than in September at a 0.9 percent yearly rate.

News of the upward revision to headline and, in particular, underlying inflation last month will be more than welcome at the ECB. However, it is still very unlikely to prevent the central bank from delivering a widely expected fresh wave of monetary easing in December. Indeed, such action has become all the more probable in the wake of the multiple terrorist attacks in Paris last Friday which threaten to undermine already fragile consumer confidence.


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.