Thu Mar 29 07:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.5% 0.4% 0.5%
Year over Year 1.7% 1.6% 1.4%

Inflation provisionally accelerated in March. A 0.4 percent monthly rise in the CPI was on the soft side of market expectations but still strong enough to see the annual inflation rate climb a couple to ticks to 1.6 percent. This was the first increase in the yearly rate since November 2017.

The flash HICP largely followed suit, also recording a 0.4 percent increase versus February that lifted its 12-month rate by 0.3 percentage points to 1.5 percent.

The acceleration in the annual CPI rate was largely attributable to the more volatile components. Hence, food inflation jumped from 1.1 percent to 2.9 percent while the energy rate rose from 0.1 percent to 0.5 percent. Elsewhere, overall goods saw a 0.2 percentage point gain to 1.4 percent and services matched this in rising to 1.8 percent. Rent, excluding utilities was flat at 1.6 percent.

The pick-up in German inflation this month bodes well for the Eurozone as a whole (flash HICP due 4th April). However, the signs are that the underlying rate will be little changed in which case the likelihood of the ECB maintaining its current policy stance through September will be all the greater.

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.