Fri Jan 05 04:00:00 CST 2018

Consensus Actual Previous
Year over Year 1.4% 1.4% 1.5%

Eurozone inflation provisionally slowed a little in December. At 1.4 percent, the flash annual rate was in line with market expectations but still a tick short of its final November print and at its joint lowest mark since July.

There was only marginally better news on the core rates which at least held steady at their respective mid-quarter levels. Hence, the narrowest measure, which excludes energy, food, alcohol and tobacco, remained at a 0.9 percent annual rate while omitting just energy and unprocessed food the rate was stable at 1.1 percent. Both measures have now been flat for three consecutive months. Inflation in the key services area was similarly unchanged at 1.2 percent while non-energy industrial goods edged a tick firmer to 0.5 percent, a 3-month high. Food, alcohol and tobacco recorded a 2.1 percent rate, down from 2.2 percent and energy 3.0 percent after 4.7 percent.

The ECB will hardly be pleased by the persistent sluggishness of underlying inflation but the December results will come as little surprise and will be seen as providing further justification for extending the QE programme this year.

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.