Wed May 23 03:30:00 CDT 2018

Consensus Actual Previous
Month over Month 0.5% 0.4% 0.1%
Year over Year 2.5% 2.4% 2.5%

Consumer prices rose 0.4 percent on the month in April. This was slightly short of market expectations and small enough to shave a tick off the annual inflation rate which now stands at 2.4 percent, its lowest reading since March 2017. Headline inflation has now declined for three successive months and is some 0.7 percentage points below its recent peak in November 2017.

There was also good news on core prices which similarly showed a 0.4 percent increase from March. This made for a 2.2 percent 12-month rate, a 0.1 percentage point dip from last time and, similarly, the weakest print in more than a year.

The main downward contribution to the monthly change in the annual CPI rate came from transport. Here, Easter timing effects were key and saw air fares falling 0.2 percent on the month compared with an 18.6 percent jump over the same period a year ago. Clothing and footwear (0.4 percent versus 1.1 percent) also had a negative impact and, to a lesser extent, food and drink. A partial offset was provided by communications where telephone equipment gained a monthly 0.4 percent compared with a 1.0 percent drop last year.

Today's headline inflation rate matches the BoE MPC's latest forecast and so does nothing to undermine their decision earlier this month to leave policy on hold. The overall rate is clearly still above target but another dip in the core suggests that underlying trends are moving in the right direction. Certainly, it makes it all the harder for the hawks to justify any fresh call to tighten at the next meeting in June.

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.