October 31, 2016 05:00 CDT

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

The annual inflation rate slipped back below zero this month according to the preliminary data. An unchanged level of the CPI versus September was enough to see the yearly change slide from 0.1 percent to minus 0.1 percent, its eighth negative print in the last nine months.

The HICP rose 0.2 percent on the month but this was also soft enough to reduce its annual rate by a couple of ticks to minus 0.1 percent.

In fact, the underlying picture weakened even more markedly with the yearly ex-energy and unprocessed food rate declining fully 0.3 percentage points to just 0.2 percent. Leisure and culture (0.0 percent after 0.3 percent), communication (minus 1.3 percent after minus 1.0 percent) and education (0.6 percent after 0.9 percent) did most of the damage.

The October inflation data are worryingly soft. In particular, the slide in the core rate warns that any improvement in economic activity remains far too limited to provide any real boost to prices. Italian inflation, or rather the lack of it, continues to be a major problem for ECB policymakers.

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 widely used measures of inflation. A provisional estimate, with limited detail, is released about two weeks before the final data are reported.

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.