January 31, 2017 01:45 CST

Consensus Actual Previous
Month over Month -0.5% -0.2% 0.3%
Year over Year 1.4% 0.6%

Consumer prices held up rather better than expected this month. A provisional 0.2 percent monthly decline was less than half the expected fall and, combined with favourable base effects, enough to lift the annual inflation rate by fully 0.8 percentage points to 1.4 percent, equalling its highest mark since October 2012.

The flash HICP followed suit, also posting a 0.2 percent drop versus November for a 1.6 percent yearly gain, double the mid-quarter rate.

The acceleration in the yearly CPI rate in large part reflected the strength of food (1.3 percent after 0.7 percent) and, in particular, energy (10.0 percent after 4.3 percent) where higher oil prices combined with a hike in taxes on petroleum products. Overall manufactured goods inflation climbed from minus 1.0 percent to minus 0.3 percent while services saw a smaller 0.2 percent increase to 1.1 percent.

Today's headline data are misleadingly firm and the core index will look notably softer when the final report is released next month. Still, if rising actual inflation can boost households' inflation expectations, there may be room for underlying prices to start firming too. Certainly, this is what the ECB will be hoping.

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 represent the main rates of inflation. The national CPI is released alongside the HICP, Eurostat's harmonized measure of consumer prices. A flash estimate was released for the first time in January 2016 and is now published towards the end of each reference 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 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, France's interest rates are set by the European Central Bank.

France like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). The HICP is calculated to give a comparable inflation measure for the EMU. Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies.

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.