Wed Dec 02 04:00:00 CST 2015

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

Inflation was provisionally unchanged at just a 0.1 percent annual rate in November. The flash estimate was short of expectations and with both core measures heading south, the outcome will inevitably boost expectations of ECB easing tomorrow.

Excluding food, alcohol, tobacco and energy the yearly rate dropped a surprisingly large 0.2 percentage points to 0.9 percent and so fully reversed October's gain. Without just unprocessed food and energy inflation dipped a tick to 0.9 percent. Weakness was most apparent in services where a 1.1 percent yearly rate was down from 1.3 percent at the start of the quarter and matched its recent June trough. However, non-energy industrial goods also fell 0.1 percentage points to 0.5 percent. Other minor downward pressure came from food, alcohol and tobacco (1.5 percent after 1.6 percent), partially offset by less marked energy deflation (7.3 percent after 8.5 percent).

To really dent ECB easing speculation November inflation would have needed to show a sharp acceleration. As it is, the surprisingly soft headline rate and, potentially more significantly, declining underlying rates will leave the central bank all the more concerned about the attainability of its medium-term price stability goals. A failure to loosen the monetary reins on Thursday would go down like a lead balloon in financial markets.

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.