| Consensus | Consensus Range | Actual | Previous | Revised | |
| HICP - Y/Y | 1.9% | 1.7% to 2.1% | 1.7% | 2.0% | 2.0% |
| Narrow Core - Y/Y | 2.3% | 2.2% to 2.5% | 2.2% | 2.3% |
Highlights
January's inflation estimate signals a notable easing of price pressures across the euro area, with headline inflation falling to 1.7 percent, its lowest level in several months. This marks a clear step below December's 2.0 percent and reinforces the view that disinflation is becoming more firmly embedded at the aggregate level.
The composition of inflation, however, remains uneven. Services inflation, while easing slightly to 3.2 percent, continues to run well above the headline rate, reflecting persistent domestic cost pressures linked to wages and labour-intensive activities. This suggests that underlying inflation dynamics remain sticky, even as headline inflation moderates. Food, alcohol and tobacco inflation edged higher to 2.7 percent, indicating renewed pressure on household essentials and limiting the extent of relief felt by consumers.
Non-energy industrial goods inflation remained subdued at 0.4 percent, consistent with weak demand and improved supply-side conditions. The sharp swing in energy inflation, falling deeper into negative territory at minus 4.1 percent, remains the dominant driver of the overall disinflation trend and reflects favourable base effects and softer energy prices.
In essence, the update points to cooling inflation but incomplete normalisation, with service costs still posing a challenge for sustained price stability. This brings the RPI to minus 11 and the RPI-P to 10, indicating that economic activity is now slightly below expectations in the euro area.
Market Consensus Before Announcement
The consensus looks for HICP up 1.9 percent on year and HICP narrow core up 2.3 percent on year in January, same as 1.9 percent and 2.3 percent in December.
Definition
The flash harmonised index of consumer prices (HICP) provides an early estimate of the final HICP, but using just partial data. 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. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Two of these are made available in the flash report amongst which financial markets normally concentrate upon the narrowest which excludes energy, food, alcohol and tobacco.
Description
The measure of choice in the Eurozone is the harmonized index of consumer prices (HICP) 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 Eurozone, 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.