Thu Jan 29 07:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.8% -1.0% 0.0%
Year over Year 0.0% -0.3% 0.2%

Inflation in January provisionally fell below zero for the first time since September 2009. An unexpectedly steep 1.0 percent monthly decline in the CPI (the sharpest since August 1958) was enough to shave fully 0.5 percentage points off December's mark to reduce the annual inflation rate to minus 0.3 percent, its lowest reading since July 2009. Prices were weak across all the reporting states and mean that, nationally, prices have not risen since last July.

The HICP was even softer, falling fully 1.3 percent versus year-end to stand 0.5 percent below its January 2014 level versus a 0.1 percent annual increase last time.

Inevitably the energy sector did most of the damage and the yearly change in prices here slumped from minus 6.6 percent in December to minus 9.0 percent. However, the signs are that underlying inflation eased too. Hence, overall goods inflation decreased 0.8 percentage points to minus 2.0 percent and in services the rate eased a couple of ticks to 1.2 percent. Rent, excluding utilities posted a 1.3 percent rate after 1.4 percent last time and food was off a tick at minus 1.3 percent.

Today's surprisingly soft German data inevitable make for added downside risk to the flash Eurozone inflation report due tomorrow. As the region's January ESI survey (see calendar entry) revealed earlier this morning inflation expectations have already been ratcheted down significantly since December. Now, with the German CPI rate also well into negative territory, the chances are that they will be revised down still further. The ECB's QE programme could well be around for a long time.

The consumer price index is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Germany where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer. As a member of the European Monetary Union, Germany's interest rates are set by the European Central Bank.

Germany like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). The HICP is calculated to give a comparable inflation measure for the EMU. Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies. The preliminary release is based on key state numbers which are released prior to the national estimate. The states include North Rhine-Westphalia, Baden-Württemberg, Saxony, Hesse, Bavaria and Brandenburg. The release date is not announced in advance but the preliminary estimate of the CPI follows in the same day after the last of state releases. The data are revised about two weeks after preliminary release.

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. 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 CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.