Germany's inflation rate declined to 1.9 percent in August from 2.3 percent in July. This was due to a downtick in energy prices. The last time inflation was below 2.0 percent was over three years ago, showing that inflation has now approached this key benchmark and that prices are more stable than a year earlier.

The prices of energy products decreased by 5.1 percent year-over-year, with motor fuel declining by 6.9 percent and residential energy falling by 3.8 percent, showing the most significant declines. In contrast, insurance services experienced 12.6 percent growth, while service prices increased by 3.9 percent. The persistent price increases in key sectors were underscored by core inflation, which grew by 2.8 percent. Although food prices increased by 1.5 percent, they remained below the overall inflation rate, with digestible lipids and oils experiencing a significant increase of 15.9 percent.

The modest month-over-month decrease of 0.1 percent in inflation was influenced by stable goods prices, which did not change over the month, and the decrease in energy prices. In general, the August inflation data paint a mixed inflation picture: energy prices are decreasing, but service and food costs are increasing, which could potentially affect consumer spending patterns, leaving the RPI and RPI-P at minus 4, within market estimates of the German economy.

No revisions are expected leaving annual CPI inflation at 1.9 percent, down from 2.3 percent, and the HICP rate at 2.0 percent, down from 2.6 percent and in line with the ECB's target.

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.