February 28, 2017 04:00 CST

Consensus Actual Previous
Year over Year 1.3% 1.5% 1.0%
Month over Month 0.3% 0.3%

Consumer prices provisionally rose 0.3 percent on the month in February to lift the annual inflation rate by fully 0.5 percentage points to 1.5 percent, equalling its highest reading since February 2013.

The flash HICP largely followed suit with a 0.2 percent increase versus January that put its yearly rate at 1.6 percent, up 0.6 percentage points from last time.

However, once again it was the more volatile components of the CPI basket that had by far the largest impact. Hence, the annual inflation rate for food and drink increased from 2.3 percent to 3.8 percent while non-regulated energy weighed in at 12.1 percent, a 3.1 percentage point jump from January. Elsewhere, prices were much better behaved and the core rate, which excludes unprocessed food and energy, edged just a tick firmer to 0.6 percent and so unwound January's modest dip.

Despite the swings in headline inflation, the underlying rate has been sticky around current levels for well over a year now. With considerable slack in the economy and domestic demand still struggling to gain any sustained momentum, this looks likely to remain the case during most, if not all, of 2017.

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.