Tue Mar 24 04:30:00 CDT 2015

Consensus Actual Previous
Month over Month 0.3% 0.3% -0.9%
Year over Year 0.1% 0.0% 0.3%

Inflation took another step closer to a negative rate in February. A 0.3 percent monthly rise in consumer prices was in line with market expectations but still soft enough to see their yearly change slide from 0.3 percent to zero, a new record low for the current measure.

The main downward pressure on the annual rate came from recreation and culture where prices were flat on the month this year after a 0.8 percent increase over the same period a year ago. Food and non-alcoholic drinks (minus 0.2 percent after 0.5 percent) also subtracted as did furniture, household equipment and maintenance (1.4 percent after 2.4 percent). There were no positive contributions of any significance.

The underlying picture also eased as a 0.5 percent monthly increase in the core CPI left it 1.2 percent higher than in February 2014 after a 1.4 percent annual gain last time.

The BoE has warned that inflation is likely to be particularly weak over the first half of 2015 as the fall in oil prices is compounded by sterling strength and deflationary forces elsewhere around the world. Indeed, the minutes of the March MPC meeting suggested that some members had become a little more concerned about the possibility of a sustained undershoot of the medium-term 2 percent inflation target.

However, today's data are unlikely to be of any great surprise and should leave intact the slightly greater than 50 percent likelihood of Bank Rate still being at 0.5 percent by year-end.

The consumer price index is defined as an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using HICP methodology developed by Eurostat, the European Union's statistical agency. The CPI is the Bank of England's inflation measure.

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 UK, 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.

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.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. 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.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.