Wed Jan 07 04:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.2% 0.0% -0.2%
Year over Year -0.1% 0.0% 0.2%

Consumer prices were a little firmer than expected in December. However, a provisionally unchanged CPI versus November was still soft enough to see the headline annual inflation rate drop 0.2 percentage points to zero, its weakest reading in three months.

The HICP was also flat on the month but off 0.3 percentage points on its annual rate which dropped back below zero at minus 0.1 percent.

That said, overall prices were depressed by oil market developments and the core rate, which excludes energy and unprocessed food, saw its yearly rate edge a tick firmer to 0.6 percent on the back of relative strength in communication and other goods and services costs.

Nonetheless, headline inflation is set to fall further immediately ahead as oil bills continue to shrink while weak domestic demand suggests little upside potential to underlying prices.

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 the most closely watched measures of the inflation rate. A flash estimate is available normally in the last week of the reference month or the first week of the following month.

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 the Italy 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, Italy's interest rates are set by the European Central Bank.

Italy like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies. The core CPI, which excludes fresh food, is usually the preferred indicator of short-term inflation pressures.

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.