Fri Feb 27 07:00:00 CST 2015

Consensus Actual Previous
Month over Month 0.7% 0.9% -1.1%
Year over Year -0.2% 0.1% -0.4%

Consumer prices look to have been significantly stronger than expected in February. A provisional 0.9 percent monthly increase in the CPI was largely seasonal but also helped by a rebound in energy charges. As a result, after just one month below zero, the annual inflation rate climbed back up from minus 0.4 percent to 0.1 percent.

The flash HICP moved in similar fashion; registering a sizeable 1.0 percent increase versus January to raise its yearly rate from minus 0.5 percent to minus 0.1 percent.

The rebound in prices was driven by energy which posted a minus 7.3 percent annual rate after minus 9.0 percent in January. Food also contributed with prices here down just 0.4 percent on the year following a 1.3 percent decrease last time. Overall goods inflation was up 0.6 percentage points at minus 1.4 percent while service sector prices were 0.2 percentage points firmer at 1.4 percent. Rent, excluding utilities was steady at 1.3 percent.

Annual CPI inflation rates in both Italy (minus 0.2 percent after minus 0.6 percent) and Spain (minus 1.1 percent after minus 1.3 percent) also ticked higher this month so the likelihood is that February's preliminary Eurozone rate could come as a pleasant surprise to Eurozone policymakers. Indeed, with the region's economy similarly showing some, albeit fledgling, signs of recovery, ECB President Draghi can almost look forward to Thursday's post-policy meeting press conference. That said, the overall picture remains decidedly soft and the start of QE next month cannot come fast enough.

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.