Wed Jan 17 04:00:00 CST 2018

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

The final HCIP for December confirmed the 1.4 percent yearly rate posted in the flash report. This was a tick short of its final November mark and reflected a 0.4 percent monthly gain in prices that followed a 0.1 percent increase in mid-quarter.

More significantly for ECB policymakers, the two main core rates continued to indicate no rise in underlying inflation pressures. The narrowest measure, which excludes energy, food, alcohol and tobacco, was unrevised at a 0.9 percent annual rate, matching its November print. This was 0.3 percentage points below its recent July/August peak and its third consecutive month at this level. The rate for the HICP omitting only energy and unprocessed food weighed in at 1.1 percent, also unchanged from October/November and a couple of ticks down on July/August. By contrast, the third yardstick, which leaves out just energy and seasonal food, saw its rate edge a tick higher to 1.2 percent, although this too was still below its recent high (1.3 percent).

Over the year to December 2017, the annual HICP inflation rate climbed a modest 0.3 percentage points to 1.4 percent. However, the narrowest core gauge was only flat at 0.9 percent. Essentially, the headline acceleration was attributable the its volatile components, that is, energy, where the rate climbed from 2.6 percent to 3.0 percent and, in particular, food, alcohol and tobacco, which was up 0.9 percentage points at 2.1 percent. The strengthening recovery in the Eurozone real economy last year should mean that the conditions are in place to put increasing upside pressure on underlying prices in 2018.

However, until this is borne out in the actual data, the ECB will remain very accommodative. A premature monetary tightening that snuffs out any would-be pick-up in core prices would do the central bank's credibility no good at all.

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.