Mon Jun 15 03:00:00 CDT 2015

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

CPI inflation was a touch softer than originally thought in May. A 0.1 percent increase in prices on both the month and the year was a tick less than shown in the provisional release but still the first above zero annual inflation rate since last November.

By contrast, there were no revisions to the HICP which still shows a 0.2 percent increase versus April and May 2014.

The monthly gain in consumer prices was largely attributable to a 1.8 percent bounce in the cost of unregulated energy and a 0.5 percent advance in recreation charges. Overall service prices were 0.7 percent higher on the year after a 0.3 percent annual rise in April while goods deflation eased from 0.5 percent to 0.3 percent.

Core consumer prices, which exclude unprocessed food and energy, were up 0.6 percent on the year, double their April rate.

The return to positive inflation last month may have some psychological value but the bottom line is that consumer prices in Italy remain very weak. Moreover, with producer prices still falling (annual rate minus 3.1 percent in April) and retail sales at best only flat, there is unlikely to be any real pressure on, or the scope for, retailers to sustain a meaningful increase in prices for some time yet.

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.