Wed Feb 14 01:00:00 CST 2018

Consensus Actual Previous
Month over Month -0.7% -0.7% -0.7%
Year over Year 1.6% 1.6% 1.6%

The provisional CPI was unrevised in the final report for January. Prices fell 0.7 percent on the month to put annual inflation at 1.6 percent, a tick down on the final December outturn and the joint weakest rate since last May.

The flash HICP was similarly unrevised and so still shows a 1.0 percent monthly decline and a 1.4 percent yearly rate, a 0.2 percentage point fall versus last time.

The main downward pressure on the monthly CPI change came from the usual seasonal factors. In particular, January sales saw the price of clothing and shoes fall 6.1 percent while package holidays were down fully 22.2 percent. Working in the other direction, household energy charges rose 0.5 percent and food and non-alcoholic drinks 0.8 percent. As a result, the core CPI, which excludes food and energy, declined 1.0 percent versus December which left its annual rate unchanged at 1.5 percent.

Underlying inflation has largely ignored the strengthening economic upswing so far but as labour markets continue to tighten, some upside creep still seems likely in 2018.

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.