In the Eurozone, the important measure of inflation is known as the Harmonised Index of Consumer Prices (HICP). It is harmonised because it attempts to combine the inflation figures in all the Eurozone member states and make sense of the aggregated and hopefully harmonised outcome. When one considers the differences in the economic features of the core states and of those at the periphery, it can be seen that this is not an easy task. Nevertheless, Eurostat, the EU Directorate for the complication of statistics, attempts to do just that.
The European Central Bank (ECB) pays considerable attention to the numbers that are produced for inflation in the Eurozone. This is because its legal mandate from the EU Parliament and the EU Council charges it with the maintenance of price stability. Originally this was taken to mean an annual rate of consumer price increases of no more than two per cent. However, according to Vitor Constancio, Vice President of the ECB, it was decided by the governing council, at an early stage, that too low inflation could be as much of a problem as inflation that was running too far to the up side. Consequently, they came up with the formula for price stability in the Eurozone which said that it represented inflation that was “close to, but not more than 2 per cent”.
Why they are important for Forex traders
For the last few monetary policy statements, Mario Draghi has let it be known that he and his colleagues are very concerned about low inflation, and are prepared to take steps to increase the rate in their jurisdiction. Since then, however, a number of other central bankers have gone on record to the effect that the kind of low inflation the western world is experiencing at present might not be such a bad thing after all. It will be interesting to see if, in the future, the ECB comes around to the same way of thinking.
Right now, however, the figures for inflation are seen as a major leading indicator of the fate of the Euro, given how much the ECB has been motivated to take measures to increase it towards the two per cent level, which in turn almost always tends to a weakening of the Single Currency. And later this week, on Wednesday, we will have the latest monetary policy statement and press conference from the president of the ECB, Mario Draghi, all of which are likely to be informed by the inflation figures.
In the US, the Federal Reserve has a dual mandate. As well as being responsible for price stability, the Fed is also charged with taking measures to increase employment. This provides a marked contrast to the situation in Euro land, and is one reason why the Non-Farm Payroll numbers from the US each month are so closely watched by the Forex market.