Mon Jan 05 07:00:00 CST 2015

Consensus Actual Previous
Month over Month 0.1% 0.0% 0.0%
Year over Year 0.3% 0.2% 0.6%

Inflation took another lurch down in the provisional data for December. An unchanged CPI on the month was enough to see the yearly change in consumer prices drop fully 0.4 percentage points versus its final November reading to just 0.2 percent, its lowest level since October 2009. The outcome was weaker than expected.

The HICP painted an almost identical picture, rising a minimal 0.1 percent from mid-quarter for a 0.1 percent annual rate, also some 0.4 percentage points below its final November print.

Inevitably much of the slide was attributable to tumbling oil prices and in North Rhine-Westphalia for example heating oil charges were down fully 14.4 percent on the month and motor fuel costs, 9.0 percent. At a national level, overall energy costs were down 6.6 percent on the year after a 2.5 percent decline last time.

Elsewhere, package vacations posted their usual double digit seasonal bounce but this still left prices below their level a year ago. Food prices were off 1.2 percent from December 2013 after no change in November and overall goods inflation slumped from minus 0.2 percent to minus 1.2 percent. However, both the service sector and rent (ex-utilities) were steady at 1.4 percent.

Today's German data do not bode well for Wednesday's flash Eurozone HICP report which, now more than ever, looks likely to show the annual headline inflation rate falling below zero. If so, this would be the first negative reading in more than five years. Speculation about the ECB adopting QE this quarter has just been given another boost.

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.