Wed Jan 31 04:00:00 CST 2018

Consensus Actual Previous
Year over Year 1.2% 1.3% 1.4%

Eurozone inflation provisionally fell again the month. At 1.3 percent, the yearly change in the flash HICP was down another tick versus its final December print to equal its weakest level since December 2016.

However, the outturn was towards the upper end of market expectations and, more importantly, there was some slightly better news from the core rates. Hence, excluding energy, food, alcohol and tobacco, the annual rate edged 0.1 percentage points firmer to 1.0 percent, its first increase since last August, while omitting just energy and unprocessed food, the rate was also a tick higher at 1.2 percent, a 4-month peak.

Inflation in services was flat at 1.2 percent, its fourth consecutive month at this level, but the non-energy industrial goods rate was 0.1 percentage stronger at 0.6 percent. Amongst the more volatile categories, food, alcohol and tobacco slipped a couple of ticks to 1.9 percent and energy was off 0.8 percentage points at 2.1 percent.

The ECB should be moderately happy with the preliminary January results. The worry will be that another decrease in the headline rate undermines recent signs that household inflation expectations are on the up. However, there will be relief about the gentle firming in both underlying measures. That said, current levels are still way short of the near-2 percent inflation target so immediate implications for monetary policy are limited at best.

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.