Inflation accelerated in December for the first time since last June. With prices having fallen a monthly 0.4 percent a year ago, a provisional 0.1 percent rise was enough to lift the annual inflation rate from November's final 3.2 percent to 3.7 percent. That said, following November's sharp drop this was only a 2-month high and on the soft side of the market consensus.

The flash HICP largely followed suit, posting a slightly larger 0.2 increase on the month that raised its yearly rate to 3.8 percent, up from 2.3 percent previously and now 1.8 percentage points above the ECB's target.

The acceleration in the annual CPI rate was dominated by energy where inflation jumped from minus 4.5 percent to 4.1 percent. This lay behind the rate for overall goods jumping 1.1 percentage points to 4.1 percent. However, elsewhere, inflation in services eased from 3.4 percent to 3.2 percent while food dropped a full percentage point to 4.5 percent. As a result, the core rate declined from 3.8 percent to 3.5 percent.

Combined with the inflation updates already released from France (4.1 percent after 3.9 percent) and Spain (unchanged at 3.3 percent), today's German data all but guarantee a rise in Eurozone inflation at year-end (data due tomorrow). However, the signs are that there may be some downside risks to current market expectations and, more importantly for the ECB, the core rate probably fell again. Meantime, the preliminary December report raises the German RPI to minus 11 and the RPI-P to 5. Economic activity in general is falling slightly short of market expectations but only due to the surprising softness of prices.

December's consensus is a monthly rise of 0.2 percent and a year-over-year gain of 3.8 percent versus November's lower-than-expected minus 0.4 percent monthly figure and 3.2 year-over-year rise.

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.