Thu Aug 13 01:00:00 CDT 2015

Consensus Actual Previous
Month over Month 0.2% 0.2% 0.2%
Year over Year 0.2% 0.2% 0.2%

Consumer prices look to have been rather softer than expected in July. The provisional 0.2 percent monthly increase in the CPI was confirmed as was the the annual inflation rate which now stands at 0.2 percent, its lowest mark since February and its second consecutive decline.

The HICP was somewhat firmer posting a 0.3 percent increase from June that left its annual rate unchanged at June's minimal 0.1 percent.

The fall in the headline annual rate was in part due to renewed weakness in energy where charges fell 6.2 percent on the year after a 5.9 percent drop in June. Food (0.4 percent after 1.0 percent) also had a negative impact as did goods (minus 0.7 percent after minus 0.5 percent). However, services saw their rate climb 0.2 percentage points to 1.1 percent and rent, excluding utilities, was stable at 1.2 percent.

Although biased down by the more volatile sectors, today's update will hardly cheer the ECB. Not only did inflation in the Eurozone's largest member state decline this month but, if the new EU Commission figures are anything to go by, German inflation expectations have also fallen for a second successive month.

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.