February 3, 2017 04:00 CST

Consensus Actual Previous
Month over Month 0.2% 0.2% 0.4%
Year over Year 0.9% 0.9% 0.5%

Consumer prices provisionally rose 0.2 percent on the month in January. Helped by positive base effects, this was large enough to lift the annual inflation rate by 0.4 percentage points to 0.9 percent, equalling its strongest reading since August 2013.

The flash HICP was not quite so robust as a (largely seasonal) 2.0 percent monthly decline raised its yearly change from 0.5 percent to 0.7 percent.

Inevitably, the energy sector did most of the work and annual inflation in the non-regulated category jumped from 2.4 percent to fully 9.0 percent. There was also a sharp pick-up in unprocessed food (5.3 percent from 1.8 percent). Elsewhere, prices were much better behaved and the core inflation rate (which excludes both these sectors) actually dipped a tick to 0.5 percent.

The (provisional) drop in core inflation last month means that the underlying trend remains broadly flat. This is hardly surprising given the ongoing sluggishness of consumer demand. Nonetheless, it means that economic growth will need to pick up some real momentum if the ECB's near-2 percent target is to be achieved on a sustainable basis even over the medium term.

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.