Fri Feb 23 04:00:00 CST 2018

Consensus Actual Previous
Month over Month -0.9% -0.9% 0.4%
Year over Year 1.3% 1.3% 1.4%

The annual Eurozone inflation rate was confirmed at 1.3 percent in January, down a tick from its final December outturn and equalling its weakest level since December 2016. On the month, the HICP fell a hefty, but essentially seasonal, 0.9 percent, in line with market expectations.

More importantly, two of the three core rates at least moved in the other direction. Excluding energy, food, alcohol and tobacco, yearly inflation was 1.0 percent, also matching its flash estimate and a tick higher than in December. Without just energy and unprocessed food, the rate was 1.2 percent, again in line with its preliminary print, and up from a final 1.1 percent last time. Omitting energy and seasonal food, a 1.2 percent outturn was unchanged from its final year-end mark.

Consequently, the dip in the annual HICP rate was attributable to the more volatile components. Hence, energy declined 0.7 percentage points to 2.2 percent and food, alcohol and tobacco 0.2 percentage points to 1.9 percent. Non-energy industrial goods inflation was 0.1 percentage points firmer at 0.6 percent but services were only flat at 1.2 percent, their fourth consecutive month at this level.

Despite its uptick at the start of the year, underlying inflation is still below where it stood last September. As yesterday's January ECB minutes made plain, the majority of Governing Council members want to see clear signs of a sustainable increase in the core rate before making any significant changes to the current policy stance. To this end, last month was a small step in the right direction but no more than that.

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.