Mon Nov 30 04:00:00 CST 2015

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

Consumer prices were unexpectedly weak in November. A provisional 0.4 percent monthly fall in the headline index reduced the annual inflation rate by 0.2 percentage points to just 0.1 percent, its first decline since January and equalling its lowest mark since April.

The flash HICP dropped a slightly steeper 0.5 percent versus October but matched the CPI's annual rate after a 0.3 percent yearly increase last time.

Worryingly, the slide in overall CPI inflation was mirrored in the core measure (excludes unprocessed food and energy) which eased to an annual rate of 0.6 percent, a couple of ticks short of October's final print. The main downward pressure came from recreation, repair and personal cate where the yearly rate dropped from 1.4 percent in October to 0.4 percent. Unregulated energy (minus 11.2 percent after minus 12.7 percent) had the principal positive effect.

The surprising weakness of the Italian inflation data make for some additional downside risk to the full Eurozone flash HICP report due Wednesday. That said, early evidence suggests that this will be mitigated by an unexpectedly firm German outturn (flash data due later today).

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.