January 30, 2017 07:00 CST

Consensus Actual Previous
Month over Month -0.5% -0.6% 0.7%
Year over Year 2.0% 1.9% 1.7%

Consumer prices provisionally fell slightly more sharply than expected in January. Even so, with base effects positive, a 0.6 percent monthly decline still saw the annual inflation rate climb a further 0.2 percentage points to 1.9 percent, equalling its strongest mark since December 2012.

The flash HICP largely followed suit with a rather sharper 0.8 percent increase versus December that also lifted its yearly rate from 1.7 percent to 1.9 percent.

The CPI is seasonally soft at the start of the year and January saw the usual hefty monthly decreases in the prices of package holidays (about 20 percent) and clothing and footwear (around 5 percent). Household energy charges were little changed on the month but weakness a year ago saw the annual inflation rate here more than double to 5.8 percent. Goods inflation was up almost a percentage point at 2.7 percent and food accelerated from 2.5 percent to 3.2 percent. Rent, excluding utilities, also edged a tick firmer to 1.6 percent but, significantly, service sector inflation reversed most of December's bounce in falling 0.3 percentage points to 1.2 percent.

Today's German data increase the likelihood of another rise in Eurozone inflation this month (flash data due tomorrow). However, with base effects from energy particularly important, the core rates will need to be watched all the more closely to determine the underlying trend.

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. A provisional estimate, with limited detail, is released about two weeks before the final data are reported.

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.