Tue Feb 03 04:00:00 CST 2015

Consensus Actual Previous
Month over Month -0.1% -0.4% 0.0%
Year over Year -0.3% -0.6% 0.0%

Consumer prices provisionally fell a hefty 0.4 percent on the month in January to reduce annual inflation from 0.0 percent in December to minus 0.6 percent, its weakest outturn since September 1959.

The HICP slumped fully 2.4 percent versus December and although this was largely seasonal, its yearly drop still steepened by 0.3 percentage points to 0.4 percent.

The weakness of the energy sector, where unregulated prices slumped fully 14.1 percent on the month, was particularly apparent in the transport and housing/utilities sectors where charges fell 3.3 percent and 0.4 percent respectively. Leisure and culture (minus 0.6 percent) was also especially soft. Indeed, headline prices would have been weaker still but for a 0.6 percent jump in food and beverage bills.

Excluding unprocessed food and energy the CPI was running at a 0.3 percent yearly rate last month. While at least above zero this was still 0.3 percentage points short of its December pace and suggests that the underlying picture has weakened significantly too. Recent news on the real economy has been a little bit brighter of late but growth will need to accelerate quickly if current deflationary trends are not to become yet more of a problem for national policymakers.

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.