Wed Feb 28 04:00:00 CST 2018

Consensus Actual Previous
Month over Month 0.2% 0.1% 0.3%
Year over Year 0.7% 0.6% 0.9%

Consumer prices provisionally rose just a monthly 0.1 percent in February. This was small enough to reduce the annual inflation rate from 0.9 percent to 0.6 percent, its weakest mark since December 2016.

The flash HICP fell 0.3 percent versus January to put its 12-month rate at 0.7 percent, a sizeable 0.5 percentage point drop from its final outturn at the start of the year.

However, the monthly deceleration in the headline annual CPI rate was almost wholly attributable to the more volatile basket components. In particular, non-processed food (minus 3.2 percent after 0.4 percent) and regulated energy (5.2 percent after 6.4 percent) weighed significantly. Consequently, the core measure, which excludes fresh food and energy, held up much better and even showed a modest 0.1 percentage point increase to 0.6 percent.

Nonetheless, even allowing for the downside bias from food and energy, Italian inflation remains very soft. The underlying trend has been flat for some time now and there has been little in recent economic data to suppose that this will change anytime soon.

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.