EMU: HICP


Wed Dec 16 04:00:00 CST 2015

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

Highlights
Eurozone inflation was revised fractionally firmer in the final data for November. A slightly smaller than expected 0.1 percent monthly dip in the HICP was enough to boost its annual rate of change from the 0.1 percent previously reported to 0.2 percent, equalling its strongest print since May.

However, the positive revision to the headline was not mirrored in the core measures. Hence, excluding energy, food, alcohol and tobacco and omitting just energy and unprocessed food, the yearly rate matched the common flash estimate of 0.9 percent, down from 1.1 percent and 1.0 percent respectively in October. Without only energy and seasonal food, the rate was 0.8 percent after 0.9 percent at the start of the quarter. Amongst the major subsectors, annual inflation in services slowed from October's 1.3 percent to 1.2 percent and also eased a tick to 0.5 percent in non-energy industrial goods. Consequently, it was energy (minus 7.3 percent after minus 8.5 percent) that provided most of the headline boost.

Regionally, the highest inflation rate was recorded in Belgium (1.4 percent) ahead of Malta (1.3 percent) and Portugal (0.6 percent). At the other end of the ladder, prices dropped the steepest in Cyprus (1.5 percent) ahead of Slovenia (0.9 percent) and Lithuania (0.5 percent).

The minor upward revision to headline inflation will do little to cheer the ECB as the underlying picture is still as soft as previously indicated and, moreover, weaker than in October. It remains to be seen whether or not the ECB's latest easing initiatives prove sufficient to raise inflation enough to prevent market speculation about yet another loosening of policy in the first half of next year.

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.