Inflation fell sharply and by much more than expected at the start of 2023. With prices jumping a full percentage point a year ago, a provisional 0.2 percent monthly increase this January was small enough to reduce the headline annual rate from December's final 3.7 percent to 2.9 percent. This was fully 0.4 percentage points below the market consensus and easily more than unwound December's 0.5 percentage point spike. Indeed, this was the lowest reading since June 2021.

HICP inflation followed much the same route with a 0.2 percent monthly fall in the index that reduced its yearly rate from 3.8 percent to 3.1 percent, now 1.1 percentage points above the ECB's target.

That said, the deceleration in the annual CPI rate was dominated by energy where inflation slumped from 4.1 percent to minus 2.8 percent. The drop here did much to cut the rate for overall goods by a sizeable 1.8 percentage points to 2.3 percent. Food (3.8 percent after 4.5 percent) also subtracted. However, elsewhere, inflation in services rose from 3.2 percent to 3.4 percent. As a result, the core rate declined just a tick to 3.4 percent.

Combined with the steep slide already reported in France (3.4 percent after 4.1 percent), today's German update supports expectations for a marked drop in this month's headline Eurozone inflation rate (flash date due tomorrow). However, the key core rates are likely to be much stickier. The preliminary German data trim the national RPI to minus 46 and the RPI-P to minus 38. Economic activity in general continues to lag market expectations by some distance.

January's consensus is cooling to 3.3 percent versus 3.7 percent in December which, for the first time since June, was up from the prior month's 3.2 percent.

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.