Highlights
The flash estimate of consumer prices was confirmed in the final report which showed a slightly smaller than expected 0.2 percent monthly gain in the HICP boosting annual inflation from minus 0.3 percent in September to minus 0.1 percent.
The core rates once again pointed to an absence of any real underlying inflation pressures. Hence, excluding food, drink, tobacco and petrol the annual rate held steady at 1.2 percent while omitting just unprocessed food and petrol it slipped 0.1 percentage points to 1.0 percent. The latter performance was matched by the other main core measure, the HICP less seasonal foods and petrol.
Indeed, amongst the major sectors, annual inflation rates accelerated in just education (to 1.5 percent from 0.6 percent), energy (minus 8.5 percent from minus 11.0 percent) and, reflecting higher fuel costs, transport (minus 2.0 percent from minus 3.7 percent).
Inflation continued to fall in a number of areas including clothing (0.3 percent from 0.5 percent), household equipment (1.4 percent from 1.5 percent) and health (1.1 percent from 1.2 percent). The 12-month rise in food prices also slipped from minus 1.3 percent to minus 1.5 percent.
Regionally annual inflation rose most markedly in Germany (by 0.4 percentage points to minus 0.1 percent), Greece (0.5 percentage points to 1.2 percent), Spain (0.4 percentage points to minus 0.6 percent), and the Netherlands (0.4 percentage points to 0.4 percent). The only falls occurred in Malta (from 0.8 percent to minus 0.5 percent) and Slovakia (0.0 percent to minus 0.1 percent), Italy (0.4 percent to 0.3 percent) and Finland (1.1 percent to 0.6 percent).
With still considerable uncertainty over both the strength and durability of the economic recovery, the ongoing weakness of Eurozone inflation affords the ECB the luxury of time to consider when to embark on any exit strategy. Indeed, just this morning Governing Council member Weber was making warning noises about the sustainability to the upswing.
Plans on how and when to remove the extraordinary monetary stimulus currently in place will be discussed at length but their early implementation remains very unlikely.
Definition The harmonized index of consumer prices (HICP) is an internationally comparable measure of inflation calculated by each member of the European Union using a specific formula. Since January 1999, the European Central Bank has used the HICP as its target measure of inflation.
Why Investor's Care 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.