EMU: HICP Flash


Wed Apr 04 04:00:00 CDT 2018

Consensus Actual Previous
Year over Year 1.4% 1.4% 1.2%

Highlights
Eurozone inflation provisionally accelerated in March for the first time since last November. A 1.4 percent annual rate was up 0.3 percentage points from the final February reading and in line with market expectations. However, note that the early Easter this year is likely to have provided a temporary boost as retailers and service providers lifted prices in anticipation of the holiday period. Any such effects should be unwound in the April data.

As it is, the key core HICP measures were much more subdued. Hence, the yearly rate for the narrowest gauge, which excludes energy, food, alcohol and tobacco, was only flat at 1.0 percent while omitting just unprocessed food and energy the rate edged only a tick higher to 1.3 percent.

Easter distortions almost certainly contributed towards a bounce in services inflation (1.5 percent after 1.3 percent) but the non-industrial goods rate (0.2 percent after 0.6 percent) was sharply weaker. Elsewhere, food, alcohol and tobacco (2.2 percent after 1.0 percent) saw a marked gain but energy (2.0 percent after 2.1 percent) was essentially unchanged.

The ECB is unlikely to be impressed by today's report. The headline acceleration will be welcome but, in addition to the probable Easter boost, bad weather may also have offered a short-lived helping hand. Indeed, there is a risk that the core inflation measures could even decline this month. Until the April HICP report is available, it will not be possible to determine the underlying trend with any real accuracy but it is clear that it remains frustratingly sluggish.

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.