October sees Germany’s annual CPI inflation ease to 2.8%

Germany's annual inflation eased to 2.8% in October.
Below 1.1200, EUR/USD posts a marginal decline for the day.

Price pressures in Germany eased in October, with preliminary annual Consumer Price Index inflation falling to 2.8% from September's 3.3%, according to figures released by Germany's Destatis on Friday.

Consumer prices fell 0.2% month-on-month, reversing September's 0.6% rise. The reading was below market expectations of a 0.1% increase.

Annual inflation based on the Harmonised Index of Consumer Prices (HICP), the European Central Bank's (ECB) preferred inflation measure, stood at 2.8%. This was below both September's 3.3% increase and the market forecast of 3.1%.

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How did EUR/USD respond?

A modest decline in EUR/USD followed the release of Germany's weaker-than-expected inflation figures. The pair stood at 1.1170 at the time of writing, marginally down for the day.

Inflation: key questions answered

How is inflation defined?

The increase in the cost of a representative basket of goods and services is measured by inflation. Headline inflation is generally reported as a percentage change, both month-on-month (MoM) and year-on-year (YoY). To calculate core inflation, more volatile components, including food and fuel, are excluded because their prices can shift with geopolitical developments and seasonal factors. Economists concentrate on this core measure, which is also targeted by central banks under their mandate to maintain manageable inflation, typically around 2%.

What does the Consumer Price Index (CPI) measure?

Changes in the prices of a basket of goods and services over time are tracked by the Consumer Price Index (CPI). These changes are generally presented in percentage terms on both a month-on-month (MoM) and year-on-year (YoY) basis. Central banks target Core CPI because it leaves out volatile food and fuel components. A Core CPI reading above 2% typically leads to higher interest rates, while a reading below 2% usually has the reverse effect. Higher interest rates support a currency, so rising inflation generally strengthens it; falling inflation tends to have the opposite effect.

How does inflation affect foreign exchange markets?

A country's currency tends to appreciate when inflation is high and weaken when inflation is low, even if this appears counter-intuitive. The reason is that central banks normally respond to higher inflation by raising interest rates. Those higher rates draw in more global capital from investors seeking an attractive return on their funds.

How do inflation changes affect Gold prices?

Historically, investors sought Gold during periods of high inflation because it retained its value. They still often buy Gold for its safe-haven qualities during extreme market turbulence, but this pattern does not hold most of the time. High inflation prompts central banks to raise interest rates to bring price pressures 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 keeping funds in a cash deposit account. Conversely, lower inflation generally supports Gold by bringing interest rates down and making the precious metal a more attractive investment alternative.