Thu Feb 12 01:00:00 CST 2015

Consensus Actual Previous
Month over Month -1.0% -1.1% -1.0%
Year over Year -0.3% -0.4% -0.3%

Consumer prices were even weaker than initially estimated last month. The final January data showed a 1.1 percent monthly drop, a tick steeper than reported previously, for a minus 1.1 percent annual inflation rate, also 0.1 percentage points down versus its flash print and some 0.6 percentage points lower than in December.

However, the HICP was unrevised and so still indicates a 1.3 percent decline from year-end and a 0.5 percent yearly fall after a 0.1 percent increase in December.

Inevitably last month's negative annual inflation print was largely due to the weakness of energy costs and heating oil charges were down nearly 31 percent on the year and motor fuels more than 15 percent. Indeed, excluding energy, prices were up 0.8 percent from January 2014. Food (minus 1.3 percent) also subtracted from the yearly change and without both this sector and energy the annual inflation rate was a relatively firm 1.1 percent.

The positive yearly prints for the core rates suggest that deflationary pressures in Germany are rather less marked than in some other Eurozone countries. Nonetheless, the downward revision to headline prices still threatens to prompt a further downgrading of inflation expectations that, in turn, triggers unwelcome second round effects at the expense of what is still, a sluggish economic recovery.

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.