May 31, 2017 01:45 CDT

Consensus Actual Previous
Month over Month 0.2% 0.1% 0.1%
Year over Year 1.0% 0.8% 1.2%

Consumer prices provisionally edged up just 0.1 percent on the month in May. With base effects quite negative, this was enough to reduce the annual headline inflation rate by fully 0.4 percentage points to 0.8 percent, its lowest mark since January.

The flash HICP was softer still, showing no change versus April and a 0.9 percent yearly rate, down from 1.4 percent last time.

However, the sharp drop in the annual inflation rate was almost wholly attributable to the more volatile components of the CPI basket. Hence, energy prices were up only 5.4 percent on the year after a 9.3 percent jump in April while food inflation slipped 0.3 percentage points to 0.4 percent. More significantly, manufactured products (minus 0.7 percent) as well as services (1.0 percent) recorded no change. As such the signs are that the core rate was broadly flat this month (0.5 percent in April).

Even so, there is nothing here to offer any real reassurance that underlying French inflation is moving in the right direction. To be sure, if it is, it is doing so very slowly.

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.