EMU: HICP


Fri Jun 15 04:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.5% 0.5% 0.3%
Year over Year 1.9% 1.9% 1.2%
Underlying HICP m/m 0.3% 0.3% 0.2%
Underlying HICP y/y 1.1% 1.1% 0.7%

Highlights
Eurozone inflation was unrevised in the final data for May. A 0.5 percent monthly increase in the HICP confirmed the 1.9 percent annual rate shown in the flash report, matching its strongest reading since February 2017.

The yearly core rates were also in line with their preliminary estimates. Hence, the narrowest measure, which excludes energy, food, alcohol and tobacco, was 1.1 percent, up from a (revised) final 0.8 percent in April, while omitting just energy and unprocessed food inflation was 1.3 percent, 0.2 percentage points stronger than last time. Without energy and seasonal food, the rate was also 1.3 percent after 1.1 percent.

Today's inflation update is of little consequence in the wake of yesterday's decision by the ECB to amend its QE programme. However, inflation going forwards will be vital to policy as the central bank has made plain its data-dependency. Its new forecasts show the headline rate at just 1.7 percent in 2019 and 2020, effectively still short of its near-2 percent target. But, core inflation is seen rising to 1.9 percent in 2020 which, if correct, provides justification for ending the asset purchase programme. However, should the underlying rate prove as sticky as it has over the last year or so, an outright tightening of policy could be a very long way off yet.

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.