Mon Sep 18 04:00:00 CDT 2017

Consensus Actual Previous
Month over Month 0.3% 0.3% -0.5%
Year over Year 1.5% 1.5% 1.3%

With as an expected 0.3 percent increase on the month, the final HICP print for August confirmed the flash estimate's annual 1.5 percent inflation rate. This was up 0.2 percentage points from the final July outturn and the strongest reading since April (1.9 percent) which was temporarily boosted by Easter effects.

However, as revealed in the flash report, the acceleration in the headline data was not mirrored in the core indices. Hence, the narrowest gauge, which excludes energy, food, alcohol and tobacco, was still 1.2 percent and so in line with July's final mark. Similarly, without just energy and unprocessed food and omitting only energy and seasonal food the rate held steady at 1.3 percent. Non-energy goods and service sector inflation were also flat at 0.5 percent and 1.6 percent respectively.

Still, ignoring Easter distortions, underlying inflation at least seems to be moving in the right direction, albeit only very slowly. The ECB would no doubt loved to have seen an upward revision to the core rates today but the unchanged data should leave the central bank on course to announce a recalibration of monetary policy at its next meeting on 26th October.

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.

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.