Mon Jan 04 07:00:00 CST 2016

Consensus Actual Previous
Month over Month 0.2% -0.1% 0.1%
Year over Year 0.6% 0.3% 0.4%

Consumer prices were significantly weaker than expected in December. A provisional 0.1 percent monthly fall in the CPI was well short of market expectations and soft enough to reduce the annual inflation rate from 0.4 percent to 0.3 percent, its first decline since September.

The HICP was almost as subdued, registering no change from mid-quarter to lower its 12-month rate from 0.3 percent to 0.2 percent.

The main downward pressure on the yearly change in the CPI came from the food sector where the rate dropped fully 0.9 percentage points to 1.4 percent and so more than unwound November's sharp gain. Energy (minus 6.5 percent after minus 7.5 percent) provided a boost but rent, ex-utilities dipped a tick to 1.0 percent and services were flat at 1.2 percent. Overall goods deflation held steady at 0.6 percent.

Today's German report makes for some downside risk to the full Eurozone flash HICP, due tomorrow and currently expected to show a 0.1 percentage point increase in its annual rate to 0.3 percent. The ECB is in no hurry to ease again but any unexpected weakness in the HICP data - particularly the core measures - would inevitably boost market speculation about more QE at some point.

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.