Wed Apr 18 04:00:00 CDT 2018

Consensus Actual Previous
Month over Month 1.0% 1.0% 0.2%
Year over Year 1.4% 1.3% 1.1%
Underlying HICP y/y 1.0% 1.0% 1.0%
Underlying HICP m/m 1.4% 0.4%

The final estimate of Eurozone inflation last month surprisingly shaved a tick off the flash outturn. At 1.3 percent, the annual rate is now seen up a smaller 0.2 percentage points from its final February mark and so only reversed that month's decline.

However, the headline revision was attributable to the more volatile basket components and, significantly, the core rates matched their respective preliminary readings. Hence, the narrowest measure, which excludes energy, food, alcohol and tobacco, was unchanged from its lowly 1.0 percent mid-quarter print while omitting just energy and unprocessed food the rate was a tick firmer at 1.3 percent. The third core, which excludes only energy and seasonal food, similarly weighed in at 1.3 percent, also up from 1.2 percent.

Confirmation of a pick-up in two of the three underlying inflation measures will be well received at next week's ECB meeting. However, inflation on all the main HICP gauges is still too low for comfort and the likelihood is that an early Easter provided March with at least a small short-term boost. If so, this should be unwound in the April data. In any event, there is no room for complacency, especially should the apparent deceleration in first quarter growth be extended into the current quarter. ECB policy still looks fixed through at least September.

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. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

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.