Mon Jun 01 07:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.1% 0.1% 0.0%
Year over Year 0.7% 0.7% 0.5%

The annual inflation rate provisionally accelerated for a fourth consecutive month in May. On the back of a 0.1 percent monthly rise, the annual increase in consumer prices climbed a further 0.2 percentage points to 0.7 percent, in line with expectations and its highest mark since October 2014.

The HICP moved in tandem, also posting a 0.1 percent gain versus April and a 0.7 percent yearly rate, up from 0.3 percent last time.

Promisingly, outside of rent (ex-utilities) all of the major CPI categories saw higher annual rates. Hence, goods inflation climbed 0.3 percentage points to minus 0.3 percent while the service sector matched this gain to stand at 1.5 percent. Energy (minus 5.0 percent after minus 5.9 percent) and food (1.4 percent after 1.1 percent) also boosted the headline data.

May's provisional acceleration in German inflation bodes well for a pick-up in the full Eurozone flash rate due tomorrow. This would be nicely timed coming just a day ahead of this month's ECB policy announcement and should ensure another relatively upbeat statement by central bank Chief Draghi at his post-meeting press conference. That said, the final April figures showed national HICP inflation rates still below zero in some nine Eurozone member states so the ECB's near-2 percent target level remains a long way off.

The consumer price index (CPI) 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.