Mon Oct 30 08:00:00 CDT 2017

Consensus Actual Previous
Year over Year 1.7% 1.6% 1.8%
Month over Month 0.1% 0.0% 0.1%

Inflation was surprisingly low in October. Provisional results showed the CPI unchanged from its final September level to shave a couple of ticks off the annual inflation rate which now stands at 1.6 percent. This was its first decline since May.

The flash HICP painted a still softer picture, falling 0.1 percent on the month to reduce its yearly rate from 1.8 percent to just 1.5 percent.

One factor weighing on the change in annual CPI inflation was energy where the rate dropped from 2.7 percent to 1.2 percent, a 3-month low. Food (4.3 percent after 3.6 percent) moved in the other direction. Elsewhere, prices were generally quite weak. Hence, inflation in overall goods dropped 0.3 percentage points to 1.9 percent and in services decreased a sharper 0.4 percentage points to only 1.2 percent. Rent, excluding utilities was also a tick lower at 1.6 percent.

The unexpected weakness of today's German price data make for some downside risk to tomorrow's flash Eurozone inflation report. Any decline here would hardly please the ECB but, in the wake of President Draghi's comments last week, neither would it come as much of a surprise. So long as the core measures behave themselves, the central bank should not be too concerned but, on the basis of this release, there would seem to be downside risk here too.

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.