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Germany’s October CPI shows annual inflation easing to 2.8%
- Germany's annual inflation rate eased to 2.8% in October.
- Below 1.1200, EUR/USD posts a modest decline on the day.
Germany's annual Consumer Price Index inflation slowed to a preliminary 2.8% in October, down from 3.3% in September, according to figures released by Destatis on Friday.
A monthly CPI fall of 0.2% followed September's 0.6% rise, undershooting market forecasts for an increase of 0.1%.
The annual rise in the Harmonised Index of Consumer Prices (HICP), the European Central Bank's (ECB) preferred inflation measure, was 2.8%. This was below both September's 3.3% increase and the market forecast of 3.1%.
EUR/USD slips following German inflation figures
Germany's weaker-than-forecast inflation figures prompted an initial dip in EUR/USD. The pair stood at 1.1170 at the time of writing, marginally down on the day.
Inflation explained
The increase in the cost of a representative basket of goods and services is measured by inflation. Headline readings are generally reported as percentage changes month on month (MoM) and year on year (YoY). By excluding more volatile components, such as food and fuel, core inflation strips out items whose prices can fluctuate with geopolitical developments and seasonal factors. Economists concentrate on this core measure, which is also targeted by central banks under their mandate to keep inflation at a manageable level, typically around 2%.
Changes in the prices of a basket of goods and services over a given period are tracked by the Consumer Price Index (CPI). Readings are generally presented as percentage changes month on month (MoM) and year on year (YoY). Central banks target core CPI because it leaves out volatile food and fuel components. A rise in core CPI above 2% typically leads to higher interest rates, while a fall below 2% tends to have the reverse effect. Higher interest rates support a currency, so rising inflation usually strengthens it; falling inflation generally has the opposite effect.
A country's currency tends to appreciate when inflation is high and weaken when inflation is low, however counter-intuitive that may appear. To curb higher inflation, the central bank will generally raise interest rates. Those higher rates draw in more international capital from investors seeking an attractive return on their money.
Historically, investors sought out Gold during periods of high inflation for its ability to retain value. They still often buy it as a safe haven during extreme market turmoil, but this pattern does not hold most of the time. High inflation prompts central banks to raise interest rates to bring it under control. For Gold, higher interest rates are a headwind: they raise the opportunity cost of holding the metal rather than an interest-bearing asset or money in a cash deposit account. By contrast, lower inflation tends to support Gold by bringing interest rates down, making the precious metal a more viable investment alternative.
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