Wed Feb 28 04:00:00 CST 2018

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

Eurozone inflation provisionally decelerated for a third consecutive month in February. The flash data put the annual rate at 1.2 percent, in line with market expectations and down from January's final 1.3 percent mark. It was also the weakest outturn since December 2016.

More importantly, the core measures at least held their ground. Hence, excluding energy, food, alcohol and tobacco the yearly rate was steady at 1.0 percent while without just energy and unprocessed food inflation was flat at 1.2 percent. Non-industrial goods (0.7 percent) and services (1.3 percent) both saw their respective yearly rates edge a tick higher but food, alcohol and tobacco (1.1 percent after 1.9 percent) weighed while energy (2.1 percent after 2.2 percent) had little effect.

The provisional February data leave intact an essentially flat trend in underlying inflation. This may not surprise the ECB but neither will it boost hopes for meeting its price stability goals any time over the foreseeable future. Indeed, there must be some concern now that the falling headline rate could put renewed pressure on inflationary expectations. This would risk putting the near-2 percent target even further out of reach. As such, today's report should bolster the likelihood of another steady policy vote at next week's Governing Council meeting.

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.