Tue Jan 05 04:00:00 CST 2016

Consensus Actual Previous
Month over Month 0.1% 0.0% -0.4%
Year over Year 0.2% 0.1% 0.1%

Consumer prices undershot expectations at year-end. An unchanged level on the month saw the annual CPI rate also hold steady at just 0.1 percent, matching its lowest mark since April.

The flat yearly reading reflected conflicting movements amongst the basket components. Hence, upward pressure from recreation including repair and personal care (0.9 percent after 0.6 percent) and non-regulated energy (minus 8.8 percent from minus 11.2 percent) contrasted with downward pressure from transport (minus 1.7 percent after 0.6 percent) and unprocessed food (2.2 percent after 3.2 percent). However, disappointingly even the stability of the overall yearly rate was not mirrored in the core measure which excludes unprocessed food and energy. This dipped a tick to 0.6 percent.

The weakness of the year-end data leaves the Italian economy, like many other Eurozone countries, with near-zero inflation and facing the risk that any fresh falls in prices could cause consumers to defer would-be spending. Recent domestic economic news has been rather more upbeat but a solid recovery in 2016 cannot be taken for granted.

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.