EMU: HICP Flash


Fri Apr 28 04:00:00 CDT 2017

Consensus Actual Previous
Year over Year 1.8% 1.9% 1.5%

Highlights
Eurozone inflation provisionally rebounded sharply in April. A 1.9 percent annual rise in the HICP was up 0.4 percentage points from its final March rate and just a tick short of its final February posting. Accordingly, the data would seem to confirm that differences in the timing of Easter this year versus a year ago were instrumental in the surprisingly sharp deceleration last month. The April outturn was marginally firmer than market expectations.

Importantly, the acceleration in the headline rate was at least fully matched by the two cores. Hence, excluding energy, food, alcohol and tobacco inflation climbed fully 0.5 percentage points to 1.2 percent, its highest reading in four years, while omitting just energy and unprocessed food, the rate gained 0.4 percentage points to also 1.2 percent, its strongest mark since August 2013.

Service sector inflation jumped from 1.0 percent to 1.8 percent while non-energy industrial goods were unchanged at 0.3 percent. Energy (7.5 percent after 7.4 percent) was similarly broadly flat but food, alcohol and tobacco dropped from 1.8 percent to 1.5 percent.

The ECB will no doubt be relieved that the drop in inflation last month was only a temporary phenomenon and will certainly be pleased with the surprisingly sharp pick-up in both the underlying measures. Speculation about a change in the central bank's forward guidance yesterday proved premature but today's inflation update will fuel such talk ahead of the next meeting in June. This should be good news for the euro.

Definition
The flash harmonised index of consumer prices (HICP) provides an early gauge of the final HICP but using just partial data. Only the EU and Eurozone aggregate statistics are released at this stage, not figures for individual member states. In addition, only the annual (not the monthly) inflation rate is reported and subsector information is also limited. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Final data are released a round two weeks later.

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.