EMU: HICP


Mon Dec 18 04:00:00 CST 2017

Consensus Actual Previous
Month over Month 0.1% 0.1% 0.1%
Year over Year 1.5% 1.5% 1.4%

Highlights
Eurozone inflation was unrevised in the final look at November. A 0.1 percent monthly rise in the HICP left the annual inflation rate at its 1.5 percent flash estimate, up just a tick versus its final October mark but in line with the final outturns for August and September.

More importantly, there were also no revisions to the two main measures of the annual core rate. Hence, the narrowest gauge, which excludes energy, food, alcohol and tobacco, was 0.9 percent, matching both its final October print and its lowest level since March. Without just energy and unprocessed food, the rate was 1.1 percent, similarly in line with its preliminary estimate and its final October reading. The third measure, which leaves out only energy and seasonal food, also weighed in at 1.1 percent, again unchanged from October.

The final November report underlines the distance the ECB still has to go in its efforts to get inflation close to its near-2 percent target on a sustainable basis. The real economy is in its best shape since the Great Recession and the output gap is closing all the time. However, until wages begin to respond, the inflation shortfall is likely to persist. This makes labour market developments in 2018 even more important than usual.


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.