Wed May 30 07:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.3% 0.5% 0.0%
Year over Year 1.9% 2.2% 1.6%

Consumer prices were surprisingly robust in May. A provisional 0.5 percent monthly rise was comfortably stronger than expected and, with base effects significantly positive, large enough to lift the annual inflation rate by 0.6 percentage points to 2.2 percent. This was the first time that the 2 percent mark has been breached since February 2017 and equals the highest reading since November 2011.

The flash HICP followed suit with an even larger 0.6 percent monthly increase that boosted its annual gain from 1.4 percent to also 2.2 percent.

The pick-up in the yearly CPI rate was only partly attributable to energy where inflation climbed more than 2 percentage points to 5.2 percent. Hence, services (1.9 percent after 1.5 percent) more than reversed their 0.3 percentage point drop in April while the rate in goods leapt nearly a full percentage point to 2.5 percent. Elsewhere, food (3.5 percent after 3.4 percent) was broadly flat as were rents, excluding utilities (1.6 percent). Accordingly, the signs are that core inflation also accelerated this month.

The sizeable jump reported in German inflation makes for upside risk to tomorrow's Eurozone report. Indeed, with the Spanish rate released earlier also climbing some 0.9 percentage points to 2.0 percent, the current market consensus (1.6 percent) is probably too low. More importantly, it looks as if the underlying rate will similarly post a significant increase. Unwinding Easter distortions could still be a factor in this but any acceleration in the core rate will be more than welcome at the ECB.

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.