EMU: HICP


Fri Dec 16 04:00:00 CST 2016

Consensus Actual Previous
Month over Month -0.1% -0.1% 0.2%
Year over Year 0.6% 0.6% 0.5%

Highlights
Eurozone inflation was unrevised in the final look at November. A 0.1 percent monthly dip in the HICP was in line with expectations and left the annual rate unchanged at its 0.6 percent flash estimate, up from 0.5 percent in October and its highest mark since April 2014.

The core rates similarly matched their flash readings. Hence, the HICP omitting energy, food, alcohol and tobacco weighed in at 0.8 percent for a fourth consecutive month and the index excluding just energy and unprocessed food at also 0.8 percent, a tick above its final October print. Without seasonal food and energy inflation was again 0.8 percent after 0.7 percent last time.

Confirmation of still subdued headline and underlying inflation last month should leave financial markets unmoved. The ECB will be hoping that signs of increasing pressure on capacity, combined with euro weakness will translate into a faster rise in prices next year. However, this will require a sustained economic recovery and, ideally, at a rather stronger pace than seen over 2016.

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.