EMU: HICP Flash


Thu Mar 31 04:00:00 CDT 2016

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

Highlights
Eurozone inflation provisionally moved a little higher this month. At an annual rate of minus 0.1 percent, the flash March outcome was up from February's final minus 0.2 percent and in line with expectations. However, the minimal gain reversed just a fraction of the mid-quarter decline and makes little impression on the shortfall versus its near-2 percent medium-term target.

Still, there was also some improvement in the underlying picture too. Hence, excluding energy, food, alcohol and tobacco the yearly rate climbed a couple of ticks to 1.0 percent to match its January mark and without just energy and unprocessed food the rate edged 0.1 percentage points firmer to 0.9 percent. Inflation in services gained 0.4 percentage points to 1.3 percent, equalling its highest outturn since last October, but this was partially offset by a decline in the non-energy industrial goods rate from 0.7 percent to 0.5 percent. Food, alcohol and tobacco weighed in at 0.7 percent, up from 0.6 percent last time, while the decline in energy steepened from 8.1 percent to 8.7 percent.

Clearly, today's data will hardly reflect much, if any, of the impact of the ECB's easing on the 10th of the month. Nonetheless, at least the headline and core rates all moved in the right direction which should come as some solace to the ECB. That said, an early Easter may have helped to boost prices this month so the risk is that April sees some kind of an offset. In any event, for now the dangerously weak inflation environment remains intact.

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. 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.

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.