Fri Mar 16 05:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.2% 0.2% -0.9%
Year over Year 1.2% 1.1% 1.3%

Eurozone inflation was unexpectedly revised a little softer in the final data for February. A 0.2 percent monthly rise in the HICP saw the 1.2 percent annual rate indicated in the flash report trimmed by a tick to 1.1 percent. This makes for a 0.2 percentage point decline versus the final January outturn as well as the third fall in a row and the weakest print since December 2016.

However, more importantly, the core rates matched their respective preliminary estimates. Hence, the narrowest measure, which excludes energy, food, alcohol and tobacco, saw its yearly rate unchanged from January's final 1.0 percent mark while omitting just energy and unprocessed food the rate was steady at 1.2 percent. Without energy and seasonal food, inflation similarly moved sideways at also 1.2 percent.

Non-energy industrial goods inflation was 0.6 percent, in line with the January outcome, while services posted a 0.1 percentage point rise to 1.3 percent. Food, alcohol and tobacco decreased from 1.9 percent to 1.0 percent while energy was off a tick at 2.1 percent.

Despite last week's decision to switch from an easing to a neutral bias, the majority of the ECB's Governing Council remain firmly in favour of maintaining the current very accommodative monetary stance. The sluggishness of underlying inflation is still a major problem and until there are convincing signs that the near-2 percent target can be achieved on a sustainable basis, policy will go nowhere in a hurry.

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.