Tue Oct 13 03:30:00 CDT 2015

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

Consumer prices were slightly softer than expected in September. A 0.1 percent monthly drop reduced annual inflation by a tick to minus 0.1 percent, its second sub-zero reading since May.

The main downward pressure on the change in the yearly rate came from clothing and footwear where prices rose a seasonally small 2.8 percent on the month compared with a 4.0 percent bounce over the same period in 2014. In fact, this was the smallest September increase since 2008. The other main negative effects were provided by fuels and lubricants, which posted a monthly 2.9 percent fall after a 0.6 percent decrease last year, and gas, which recorded a 2.1 percent drop versus no change in 2014.

As a result, the core CPI was rather firmer, registering a 0.1 percent gain over August although this was still only firm enough to leave its annual rate steady at 1.0 percent.

The headline CPI continues to paint a misleadingly weak picture of underlying UK inflation trends. Still, whatever measure is chosen it is clear that prices are not performing as the BoE MPC would wish. To this end, financial markets over the last couple of months had already steadily pushed out their expectations of BoE tightening and today's inflation update could well extend the process. Not only have recent domestic data pointed to a cooling in UK economic growth but international developments have also increased the risk of additional downside pressure on prices.

Surprisingly strong economic news (in particular note tomorrow's wages update) could yet see Bank Rate being be raised over the coming few months but on current trends a move before the middle of 2016 is looking increasingly unlikely.

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.