Fri Sep 29 04:00:00 CDT 2017

Consensus Actual Previous
Year over Year 1.6% 1.5% 1.5%

In contrast to expectations for a small rise, Eurozone inflation was only unchanged in September according to Eurostat's flash estimate. The provisional 1.5 percent annual rate matched its final August mark and left inflation at its highest level since April.

Moreover, the headline would have been weaker but for a boost from some of the more volatile subsectors. Hence, the annual rate for food, alcohol and tobacco jumped 0.5 percentage points to 1.9 percent although energy dipped a tick to 3.9 percent. Consequently, the narrowest core measure which excludes both these categories slipped from 1.2 percent in August to 1.1 percent, equalling its lowest reading since May. Omitting just energy and unprocessed food, the rate held steady at 1.3 percent. Inflation in non-energy industrial goods was similarly flat at 0.5 percent but services were off 0.1 percentage points at 1.5 percent.

The softening in one of the core gauges will hardly please the ECB but, given the scope for monthly volatility, it will probably not be enough to prevent a recalibration of monetary policy next month. Nonetheless, the central bank has long stressed its worries about the persistent sluggishness of underlying inflation so this report hardly argues in favour of any aggressive shift in its stance.

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.

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.