Fri Aug 28 07:00:00 CDT 2015

Consensus Actual Previous
Month over Month -0.1% 0.0% 0.2%
Year over Year 0.1% 0.2% 0.2%

Provisional consumer prices were a little stronger than expected in August. An unchanged CPI versus July saw the annual inflation rate hold steady at 0.2 percent, equalling its weakest mark since February.

The HICP was a touch firmer, rising 0.1 percent from the start of the quarter which, in turn, also left its 12-month rate unmoved at just 0.1 percent.

Overall prices were held in check by renewed weakness in oil charges and annual deflation in the energy sector steepened from 6.2 percent to 7.6 percent. However, food (0.8 percent after 0.4 percent) provided a boost as did services where the rate crept up from 1.1 percent to 1.2 percent. Elsewhere, inflation dropped from minus 0.7 percent to minus 0.9 percent in goods and dipped a tick to 1.1 percent in rent, ex-utilities.

Today's provisional report for August is hardly strong enough to put a smile on the ECB's face. Still, with signs that underlying inflation in the Eurozone's largest member state is at least stabilising, if not actually accelerating, the data could have been a lot worse. The full Eurozone flash HICP is due next Monday and, prior to the German release, the annual headline rate had been expected to slip a couple of ticks to zero.

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.