Tue Sep 29 07:00:00 CDT 2015

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

The provisional estimate of September consumer prices was slightly weaker than expected. A 0.2 percent drop versus August was enough to shave a couple of ticks off the annual inflation rate which now stands at just 0.0 percent, its lowest reading since January.

The HICP was equally soft, also falling 0.2 percent on the month to yield a minus 0.2 percent yearly rate, its first sub-zero rate since February.

Softer energy prices were once again the dominant factor in the annual slowdown with the sector's prices 9.3 percent lower on the year after a 7.6 percent fall in mid-quarter. Elsewhere, the picture was somewhat mixed. Thus, the annual rate in services was just 0.1 percentage points weaker at 1.1 percent, matching its July post, while rent, excluding utilities, was a tick firmer at 1.2 percent. Food accelerated from 0.8 percent to 1.1 percent but goods inflation was down an ominous 0.4 percentage points at minus 1.3 percent.

The signs are that core inflation was probably little changed this month but today's headline data make for additional downside risk to tomorrow's flash Eurozone HICP report. The ECB has warned that the region's inflation rate might turn negative near-term due to the weakness of oil and has indicated it is prepared to look through what it expects to be a temporary distortion. However, today's German price update can hardly cheer the central bank and will help to underpin fresh easing speculation.

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.