What’s driving low inflation in the European Union?

Market Realist

Eurozone inflation: What you need to know

Headline consumer price inflation (CPI) for the Eurozone fell to 1.1% in September. The latest reading is 0.2% lower than a month prior and the lowest rate since February 2010. Inflation is closely monitored by central banks such as the ECB and deviations from their target could potentially be used as a rationale for changes in monetary policy.

(Read more: China’s wage inflation: Bad news for corporate profits and banks)

When analyzing an economy, focus on core inflation

It’s important to distinguish between headline inflation, the number that shows up in all the news wires, and core inflation, which excludes food and energy inflation. Core is more important because it measures a country’s inflation without the two components most driven by factors outside its borders. Food and energy are noisy and aren’t a good measure of demand in an economy.

When investing in the Eurozone, keep in mind the relative pricing power of your investments

Firms have seen margin pressure this year from low core inflation but relatively higher energy costs, but they stand to benefit greatly from any monetary easing because easing tends to increase demand. This allows companies to raise prices and expand margins. If that were to happen, expect euro stocks to outperform other countries.

Net exporting countries such as Germany (EWG) could benefit greatly from higher demand-side inflation in the EU, but all countries would benefit from increased demand, and investors have many options to choose from to get broad exposure to the continent, including through the iShares MSCI EMU Index ETF (EZU) and the iShares S&P Europe 350 Index ETF (IEV).

The ECB’s (European Central Bank’s) recent remarks don’t signal easing, but continued low or falling inflation prints could change their tone quickly.

(Read more: Why China triggered harmful emerging market outflows)

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