EMU: HICP


Wed Jan 18 04:00:00 CST 2017

Consensus Actual Previous
Month over Month 0.5% 0.5% -0.1%
Year over Year 1.1% 1.1% 0.6%

Highlights
Eurozone HICP inflation was confirmed at 1.1 percent in December. A 0.5 percent monthly rise in prices matched expectations and was enough to raise the yearly rate by fully 0.5 percentage points to equal its highest mark since August 2013.

There were also no revisions to the two main core measures. Hence, both excluding energy, food, alcohol and tobacco and omitting just energy and unprocessed food the yearly rate edged up from 0.8 percent in the final November report to 0.9 percent. Without just energy and seasonal food the rate followed an identical path. Non-industrial goods inflation was only unchanged at 0.3 percent but services saw a 0.2 percentage point increase to 1.3 percent. The main jump was in energy (2.6 percent from minus 1.1 percent) followed by food, alcohol and tobacco (1.2 percent after 0.7 percent),

Confirmation of December's acceleration in both headline and underlying inflation, together with recent promising news on the Eurozone real economy, should leave the ECB cautiously happy going into tomorrow's Council meeting. No change in policy is all but guaranteed then and, indeed, the next several central bank meetings could prove much less interesting than of late.

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.