Thu Nov 16 04:00:00 CST 2017

Consensus Actual Previous
Month over Month 0.1% 0.1% 0.4%
Year over Year 1.4% 1.4% 1.5%

Eurozone inflation was unrevised in the final data for October. A 0.1 percent monthly rise in the HICP put the yearly inflation rate at 1.4 percent, in line with its flash estimate and a tick short of its final September mark. This was the first decline in the yearly rate since June.

More importantly, there was also confirmation of weak underlying prices. Hence, the narrowest core measure, which excludes energy, food, alcohol and tobacco, dropped 0.2 percentage points to a 0.9 percent annual rate, matching its softest outturn since March. Omitting just energy and unprocessed food and without only energy and seasonal food, the yearly rate similarly decreased 0.2 percentage points to 1.1 percent. Inflation in non-energy industrial goods dipped a tick to 0.4 percent and in services fell fully 0.3 percentage points to 1.2 percent.

Today's update adds nothing new to the Eurozone inflation picture but the persistent weakness of all three underlying gauges must worry the ECB. In the absence of any major economic shocks, monetary policy has already been set for most of 2018 but it is far from clear that the stance will be successful in boosting inflation to its near-2 percent target level on a sustainable basis.

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.