Thu Jun 28 07:00:00 CDT 2018

Consensus Actual Previous
Month over Month 0.1% 0.1% 0.5%
Year over Year 2.2% 2.1% 2.2%

Consumer prices provisionally moved much as expected in June. A 0.1 percent monthly rise was small enough to shave a tick off the annual inflation rate but, at 2.1 percent, this was still one of the highest readings since late 2011.

The flash HICP followed suit with also a 0.1 percent increase versus May that reduced its yearly rate to 2.1 percent from 2.2 percent.

In terms of the change in annual CPI inflation, the main upward pressure came from energy where the rate climbed from 5.2 percent to 6.4 percent. However, food (3.4 percent after 3.5 percent) was a little softer and a jump in overall goods inflation (2.8 percent after 2.5 percent) was offset by a fall in services (1.5 percent after 1.9 percent). Rent, excluding utilities, was flat at 1.6 percent.

The dip in inflation in Germany contrasts with the rises already announced in Italy (see today's calendar entry) and Spain (2.3 percent after 2.1 percent) and probably means that the Eurozone's June flash HICP rate due tomorrow will show little change. More importantly for ECB policy, the underlying rates look likely to be largely stable too in which case the planned termination of the central bank's QE asset purchases this year cannot be taken for granted.

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.