January 4, 2017 04:00 CST

Consensus Actual Previous
Month over Month 0.3% 0.4% -0.1%
Year over Year 0.5% 0.1%

Consumer prices were robust in December. A provisional 0.4 percent monthly rise also added 0.4 percentage points to the annual inflation rate which now stands at 0.5 percent, equalling its highest mark since April 2014.

The flash HICP followed suit, similarly posting a 0.4 percent increase versus November and a 0.5 percent yearly rate, up from 0.1 percent last time.

The acceleration was largely attributable to more expensive non-regulated energy where prices were up 1.1 percent on the month and 2.4 percent on the year after a 0.3 percent annual rise last time. Still, even excluding energy and unprocessed food the yearly rate gained a couple of tick to 0.6 percent, matching its level back in July.

In line with the rest of the Eurozone, energy effects helped to boost headline inflation significantly last month. The key question is whether or not the underlying rate can sustain a trend upswing and, for Italy, the ongoing weakness of domestic demand makes this far from assured.

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.