Tue Jan 16 03:30:00 CST 2018

Consensus Actual Previous
Month over Month 0.3% 0.4% 0.3%
Year over Year 3.0% 3.0% 3.1%

Consumer prices behaved much as expected in December. A 0.4 percent monthly rise was a little firmer than the market consensus but still soft enough to see the annual inflation rate dip a tick to 3.0 percent, in line with expectations and its first decline since June.

The largest downward impact on the monthly change in the yearly rate came from transport which subtracted nearly 0.1 percentage points on the back of a smaller increase in air fares than a year ago. Recreation and culture together with housing and household services reduced the headline rate by a further tick. However, a partial offset came from small positive effects from furniture and household goods and alcohol and tobacco, the latter reflecting November's Budget measures. As a result, the core CPI was up a marginally smaller 0.3 percent on the month which cut its yearly rate from 2.7 percent to 2.5 percent, a 5-month low. The CPIH, the measure preferred by the ONS, also saw a 0.3 percent increase versus November which in turn reduced its annual gain from 2.8 percent to 2.7 percent.

December's yearly CPI rate is well above the 2.7 percent call made in the BoE's November Inflation Report. Still, the deceleration will be welcome as will the slightly more marked drop in the underlying rate. Today's data should have no immediate implications for monetary policy and next month's MPC decision looks likely to be another unanimous vote for no change.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

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 UK, 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.

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.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. 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.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.