Consumer prices were much weaker than expected in May. A provisional 0.1 percent monthly fall was some 0.4 percentage points below the market consensus and, with base effects strongly negative, weak enough to reduce the annual inflation rate from April's final 7.4 percent to 6.1 percent. The headline rate now stands at its lowest level since March last year.

The flash HICP followed a similar profile with a marginally steeper 0.2 percent monthly drop that cut its yearly rate from 7.6 percent to 6.3 percent, now 4.3 percentage points above the ECB's target.

The monthly fall in the annual CPI rate was driven by goods where inflation decreased from 9.3 percent to 7.7 percent. However, much of this will reflect falls in energy (2.6 percent after 6.8 percent) and food (14.9 percent after 17.2 percent). That said, there was also a welcome cooling in services (4.5 percent after 4.7 percent). Consequently, core inflation (ex-food and energy), which stood at 5.8 percent in April, probably eased slightly too.

Taken together with the French, Italian and Spanish data already released, today's German HICP data point to a fall in tomorrow's flash headline Eurozone inflation rate from 7.0 percent in March to around 6.2 percent. If so, this would be a couple of ticks less than the current market consensus. However, any decline in the core rates is likely to be much less marked and it will be underlying inflation that the ECB will be focusing upon come its next policy meeting in June.

Meantime, the German ECDI now stands at minus 16 and the ECDI-P at minus 12. Both measures show that economic activity in general is still slightly lagging market expectations.

May's consensus is a 6.5 year-over-year rate versus 7.2 percent in April which was lower than expected and helped by a sharp drop in food.

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-Wuerttemberg, Saxony, Hesse, Bavaria and Brandenburg. The preliminary estimate of the CPI follows in the same day after the last of the 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.