2.8% in October: Germany’s annual CPI inflation eases

2.8%: Germany's annual inflation eased in October.
Below 1.1200, EUR/USD posts a marginal daily decline.

2.8% was Germany's preliminary annual inflation reading for October. Based on changes in the Consumer Price Index, the figure was down from 3.3% in September, Germany's Destatis reported on Friday.

Against market forecasts for a 0.1% rise, monthly CPI fell by 0.2%. That followed September's 0.6% increase.

The Harmonized Index of Consumer Prices (HICP) recorded an annual increase of 2.8%. This measure, preferred by the European Central Bank (ECB), was below both September's 3.3% rise and the market forecast of 3.1%.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

1.1170: EUR/USD slips after German inflation data

Germany's weaker-than-forecast inflation figures prompted an immediate dip in EUR/USD. The pair stood at 1.1170 at the time of publication, marginally down on the day.

Inflation: key questions answered

Inflation and what it measures

A rise in the cost of a representative basket of goods and services is measured as inflation. The headline rate is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). By excluding more volatile components, including food and fuel, core inflation strips out items whose prices can shift with geopolitical or seasonal factors. Economists concentrate on this core measure, which central banks target under their mandate to maintain manageable inflation, usually around 2%.

Consumer Price Index (CPI): the measure explained

Price movements across a basket of goods and services over time are tracked by the Consumer Price Index (CPI). The measure is generally reported as a percentage change month-on-month (MoM) and year-on-year (YoY). Central banks target core CPI, which removes volatile food and fuel components. A core CPI reading above 2% usually leads to higher interest rates; a reading below 2% usually has the reverse effect. As higher rates support a currency, rising inflation generally strengthens it. Falling inflation typically produces the opposite outcome.

Inflation's effect on foreign exchange

Higher inflation tends to lift a country's currency, while lower inflation has the reverse effect, despite this appearing counter-intuitive. To contain higher inflation, the central bank normally raises interest rates. Those higher rates draw additional global capital from investors seeking attractive returns on their money.

Gold prices and the inflation link

Gold historically served as a store of value for investors facing high inflation. Investors still often seek its safe-haven qualities during extreme market turmoil, but high inflation does not support Gold in most circumstances. Central banks respond to high inflation by raising interest rates to bring it under control. Holding Gold becomes less attractive as rates rise because its opportunity cost increases relative to interest-bearing assets or cash deposit accounts. Conversely, lower inflation tends to support Gold by bringing interest rates down, improving the metal's appeal as an investment alternative.