Inflation in Germany in 2024 showed notable moderation compared to previous years, with the annual average consumer price index rising by 2.2 percent, a sharp decline from the 5.9 percent and 6.9 percent recorded in 2023 and 2022, respectively. December inflation accelerated to 2.6 percent in line with the consensus, driven by service price increases (4.1 percent) and a slower decline in energy prices (minus 1.6 percent). Core inflation, excluding food and energy, rose 0.3 percentage points to 3.3 percent, highlighting persistent price pressures in other sectors.

Versus the 2023 annual average, service prices in 2024 grew significantly (3.8 percent), with insurance (13.2 percent) and social facilities (7.8 percent) leading the rise. Goods prices increased modestly (1.0 percent), with food prices up by 1.4 percent despite declines in dairy (minus 2.1 percent) and vegetable (minus 1.5 percent) costs. Energy prices fell 3.2 percent, thanks to lower electricity (minus 6.4 percent) and heating oil (minus 3.9 percent) costs, but district heating surged by 27.1 percent.

The harmonised index of consumer prices reflected similar trends, with an annual average increase of 2.5 percent and a monthly rise of 0.7 percent in December. While inflation decelerated markedly, persistent price increases in services and core components signal enduring economic pressures. The latest update takes the RPI to 21 and the RPI-P to 0. This means that economic activities are generally ahead of market expectations in the German economy.

German annual inflation is seen at 2.6 percent in the final reading for December, unchanged from the preliminary report. CPI is expected up 0.4 percent on the month, unrevised from the preliminary. For the HICP, the figures are seen unrevised at 2.8 percent on the year and up 0.7 percent on the month.

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.