EMU: HICP


Wed May 16 04:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.3% 0.3% 1.0%
Year over Year 1.2% 1.2% 1.3%
Underlying HICP y/y 0.7% 0.7% 1.0%
Underlying HICP m/m 0.2% 0.2% 1.4%

Highlights
Eurozone inflation was confirmed at a lowly 1.2 percent annual rate in April. This was 0.1 percentage points short of its final March reading and the second weakest print since December 2016.

There were also no revisions to the key core rates. Hence, the narrowest measure, which excludes energy, food, alcohol and tobacco, remains at a 0.7 percent yearly rate, off some 0.3 percentage points versus March and matching its lowest outturn since April 2015. Omitting just energy and unprocessed food and also without only energy and seasonal food, the rate fell a couple of ticks to 1.1 percent.

Non-energy industrial goods inflation was actually marginally firmer at 0.3 percent, but the services sector saw a holiday-related slump of 0.5 percentage points to 1.0 percent. Energy (2.6 percent after 2.0 percent) had a small positive impact as did food, alcohol and tobacco (2.4 percent after 2.1 percent).

The narrowest yardstick of underlying inflation had been trending sideways in a tight 0.9 percent - 1.0 percent range for more than half a year. However, while the April data may be a one-off, they clearly raise the danger of a sustained breakout on the downside. Such risks can only accumulate should Eurozone economic growth not recover from a poor first quarter. The ECB must be at least a little worried.

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. 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.

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.