Mon Jun 29 07:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.1% -0.1% 0.1%
Year over Year 0.6% 0.3% 0.7%

Provisional consumer prices were much weaker than expected in June. Monthly declines in the majority of reporting states ensured an overall 0.1 percent dip which, with the CPI usually strong in June 2014, was enough to reduce the annual inflation rate from 0.7 percent to 0.3 percent. This was the first fall in the yearly rate since inflation bottomed at minus 0.3 percent in January and equalled its 3-month low.

The HICP was softer still, recording a 0.2 percent monthly fall that cut its annual rate from 0.7 percent to just 0.1 percent.

The annual deceleration reflected slower price rises in food (1.0 percent after 1.4 percent) and, in particular, services (0.9 percent after 1.5 percent). Prices also fell more sharply in the goods sector (0.5 percent after 0.3 percent) and energy (5.9 percent after 5.0 percent). Rent, excluding utilities (1.2 percent) was unchanged.

Today's surprise slide in German inflation inevitably makes for some downside risk to tomorrow's flash Eurozone HICP report, the last thing the ECB needs at this stage. Chances are that the German data are misleadingly soft but in any event, the need for full implementation of the central bank's QE programme remains as important as ever.

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.