EMU: HICP


Thu Mar 16 05:00:00 CDT 2017

Consensus Actual Previous
Month over Month 0.4% 0.4% -0.8%
Year over Year 2.0% 2.0% 1.8%

Highlights
The final HICP data for February showed no revisions from the flash report. A 0.4 percent monthly rise in prices matched market expectations and confirmed the provisional 1.8 percent annual inflation rate, up 0.2 percentage points from the final January print.

More significantly, there were also no changes made to the core measures, all of which show a 0.9 percent yearly rate in line with their common outturn in both December and January. As indicated in the flash release, the boost to headline inflation came from energy, where the annual rate climbed 1.2 percentage points to 9.3 percent, and food, drink and tobacco, where the rate jumped from 1.8 percent to 2.5 percent. The non-energy industrial goods subsector saw its rate slip from 0.5 percent to 0.2 percent while service sector inflation crept a tick higher to 1.3 percent, reversing January's dip.

There is nothing new here for the ECB to digest. Confirmation of the sluggishness of underlying inflation will be seen as fully justifying the central bank's decision last week to leave policy on hold.

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.