Tue Sep 15 03:30:00 CDT 2015

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

Consumer prices matched expectations in August. A 0.2 percent monthly increase effectively reversed July's decline and shaved a tick off the annual inflation rate which now stands at zero.

The main downward impact on the change in the 12-month rate came from transport prices which were up only 0.1 percent on the month this year compared with a 0.8 percent increase in August 2014. In particular, weaker motor fuel costs had a significant effect. There was also some downward pressure from clothing and footwear where prices climbed 1.5 percent on the month or some 1.1 percentage points less than during the same period last year.

Meantime, the main positive impact came from furniture, household equipment and maintenance where this year's increase was 0.7 percentage points more than in 2014. Food and non-alcoholic beverages similarly provided a minor boost. The core CPI climbed a mainly seasonal 0.4 percent, a small enough advance to reduce the annual underlying inflation rate from 1.2 percent to 1.0 percent.

August's headline print was in line with the BoE's latest forecast and so should have no immediate implications for policy. Particularly amidst all the speculation about a possible Fed tightening this week, there continues to be talk about a possible hike in UK Bank Rate around the turn of the year. So long as economic growth holds up and wages accelerate, this is certainly a possibility. Nonetheless, raising domestic interest rates with a zero inflation rate would be politically difficult to sell and it would be no surprise should the first hike of the new monetary cycle be deferred until 2016.

The consumer price index (CPI) 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.