Tue Jan 30 07:00:00 CST 2018

Consensus Actual Previous
Month over Month -0.5% -0.7% 0.6%
Year over Year 1.8% 1.6% 1.7%

Consumer prices provisionally fell 0.7 percent on the month at the start of 2018. Prices are seasonally soft in January but the latest decline was surprisingly sharp and steep enough to shade the annual inflation rate from 1.7 percent to 1.6 percent, equalling it lowest reading since last May.

The flash HICP largely followed suit with a 1.0 percent monthly drop that reduced its yearly rate from 1.6 percent to 1.4 percent.

The main negative impact on the change in the headline annual rate came from energy, where inflation slipped 0.4 percentage points to 0.9 percent, and goods, which saw a 0.3 percentage point slide to 1.5 percent. This left food (3.1 percent after 3.0 percent) to provide the only boost as services (1.6 percent) as well as rent, excluding utilities (1.7 percent) were only unchanged

Today's German results make for additional downside risk to tomorrow's flash Eurozone HICP report. Financial markets were already looking for a slightly softer rate than in December; this view will now have been reinforced. There is also less chance that the core rates will climb higher 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.