Fri Feb 27 04:00:00 CST 2015

Consensus Actual Previous
Month over Month 0.1% 0.3% -0.6%
Year over Year -0.5% -0.2% -0.4%

Consumer prices provisionally rose a steeper than expected 0.3 percent on the month in February. The increase, which followed January's hefty 0.4 percent drop, boosted annual inflation by 0.4 percentage points to minus 0.2 percent and so reversed the lion share of the previous period's 0.6 percentage point decline.

The HICP was equally firm; also gaining a monthly 0.3 percent to lift its yearly change from minus 0.5 percent to 0.1 percent and so back into positive territory.

In the same way that falling energy costs depressed the January data so a monthly rebound in oil prices helped to boost the overall CPI in February. However, with prices of non-regulated energy products only accelerating to a minus 12.8 percent annual rate from minus 14.0 percent last time, their impact was relatively muted. Indeed, even excluding energy the yearly inflation rate still climbed 0.3 percentage points to 0.7 percent.

Rather, it was a marked turnaround in fresh vegetable charges (11.2 percent versus minus 14.0 percent) that did most of the work. Stronger tobacco and transport costs also had a positive impact. As a result, the annual core inflation rate which excludes energy and unprocessed food increased from 0.3 percent to 0.6 percent.

Although not too much should be made on one month's worth of data, and the bigger picture is still decidedly weak anyway, February's surprisingly large bounce in inflation will be a big relief to policymakers. Indeed, with signs that the German February CPI (data due later today) will similarly surprise on the upside, for the first time in long while ECB Chief Draghi may actually look forward to next week's post-policy meeting press conference.

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.