EMU: HICP


Thu Sep 15 04:00:00 CDT 2016

Consensus Actual Previous
Month over Month 0.1% 0.1% -0.6%
Year over Year 0.2% 0.2% 0.2%

Highlights
The annual Eurozone inflation rate was confirmed at just 0.2 percent in August, matching both its final July post and its highest mark so far in 2016. On the month, the HICP was up 0.1 percent, in line with expectations and following a largely seasonal 0.6 percent decline last time.

The core rates were also unrevised. Hence, excluding energy, food, alcohol and tobacco as well as omitting just energy and unprocessed food the annual inflation rate was 0.8 percent, a tick down on its final July print for the narrower measure and unchanged for the latter. Without energy and seasonal food, the rate was 0.7 percent after 0.8 percent at the start of the quarter. Elsewhere in the HICP basket, yearly inflation was 0.1 percentage points softer in both non-energy industrial goods (0.3 percent) and services (1.1 percent). Food, alcohol and tobacco (1.3 percent after 1.4 percent) similarly dipped a tick but energy (minus 5.6 percent after minus 6.7 percent) went the other way.

Just last week the ECB's updated economic forecasts again showed only a very slow medium-term pick-up in inflation, and that with downside risk. At just 1.6 percent, the central bank's 2018 call would seem to leave the door open to further monetary easing sooner rather than later and today's data certainly do not contradict that view.

Definition
The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors.

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.