Tue Jan 16 01:00:00 CST 2018

Consensus Actual Previous
Month over Month 0.6% 0.6% 0.6%
Year over Year 1.7% 1.7% 1.7%

Consumer prices were unrevised in the final data for December to leave a 0.6 percent monthly rise and a 1.7 percent annual inflation rate, down just a tick from November's final mark. For the calendar year, prices were up an average 1.8 percent from their level in 2016.

The flash HICP was also unrevised, leaving a 0.8 percent monthly gain and a 1.6 percent yearly rate, down from November's final 1.8 percent.

December's monthly CPI gain reflected seasonal hikes in prices for package holidays (20.1 percent) and air tickets (4.7 percent). Rail fares (2.1 percent) similarly saw their usual annual adjustment and food (0.8 percent) was also more expensive. However, there was some discounting in clothing (minus 2.0 percent) and shoes (minus 1.2 percent). Overall goods prices were flat while services jumped 1.2 percent.

Excluding household energy, the CPI increased 0.6 percent versus November for a 1.6 percent yearly rate, a tick short of its print last time. Without food and energy prices were also up 0.6 percent for a 1.5 percent annual rate, matching their November outturn.

The final December report means that both headline and core CPI inflation were essentially flat during 2017. The lack of any significant acceleration in the underlying rate is surprising given the increasing tightness of the labour market. However, if successful, last week's strikes over pay and hours by the powerful IG Metall union could presage a general pick-up in pay that would boost inflation in 2018. The ECB would not be unhappy if this were the case.

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.