Germany's inflation report shows that the annual inflation rate of 2.2 percent has now gone above the medium term target of 2.0 percent, the first time in three months and 0.1 percent below the consensus. The month-over-month rate declined by 0.2 percent, 0.4 percentage points below the consensus and suggesting a cooling of short-term inflationary momentum.

The harmonised index of consumer prices, a broader measure used for Eurozone comparisons, exhibits a slightly higher annual rate of 2.4 percent compared to the consumer price index. This figure is in line with the previous month, but also shows a more pronounced monthly decline of 0.7 percent. Notably, core inflation, excluding volatile components like food and energy, stands at a higher 3.0 percent. This underscores persistent underlying price pressures, likely driven by structural or service sector costs.

The flat yearly HICP rate reduces upside risk to tomorrow's key Eurozone report. For businesses and consumers, the easing of the monthly inflation offers short-term relief, but core pressures signal continued challenges to purchasing power. The latest update nudges the German RPI to minus 44 and the RPI-P to minus 52, leaving economic activity in general running well behind market expectations.

German headline inflation is seen up 0.2 percent on the month and up 2.3 percent on the year in the initial November reading.

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.