EMU: HICP Flash


Thu Nov 30 04:00:00 CST 2017

Consensus Actual Previous
Year over Year 1.6% 1.5% 1.4%

Highlights
Annual Eurozone inflation accelerated in November according to the flash report. However, at 1.5 percent, the rate was just 0.1 percentage points firmer than its final October reading and short of market expectations.

There was also some disappointing news on the core rates, both of which were unchanged from their respective October prints. The narrowest gauge, which excludes energy, food, alcohol and tobacco, remained at just 0.9 percent, some 0.3 percentage points below its recent 1.3 percent August high. Omitting just energy and unprocessed food, the rate was steady at 1.1 percent, again a couple of ticks below its recent peak.

Inflation in non-energy industrial goods and services was unchanged at 0.4 percent and 1.2 percent respectively while elsewhere, a jump in energy (4.7 percent after 3.0 percent) was essentially offset by a dip in food, alcohol and tobacco (2.2 percent after 2.2 percent).

The ECB may be somewhat disappointed by today's data. The minor acceleration in the headline rate will be welcomed but the persistent sluggishness of the underlying measures will be seen as further evidence of the need to keep the QE programme running through 2018.

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.