In line with December, headline inflation again fell surprisingly sharply at the start of the year. A provisional 8.5 percent annual rate was well down on the previous period's final 9.2 percent and some 0.6 percentage points short of the market consensus. The decline, which reflected a 0.4 percent monthly fall in prices, reduced the yearly rate to its lowest level since last May but still left a gap of fully 6.5 percentage points with the ECB's 2 percent target.

In fact, once again the deceleration in the overall rate was not mirrored in the key core measures. Hence, the narrowest gauge was only unchanged at 5.2 percent and higher than expected while the broader index which excludes just energy and unprocessed food climbed another tick to 7.0 percent, another new record high. More generally, the rate for non-energy industrial goods jumped from 6.4 percent to 6.9 percent while its services counterpart unwound December's gain by easing from 4.4 percent to 4.2 percent. Energy (17.2 percent after 25.5 percent) subtracted significantly but food, alcohol and tobacco (14.1 percent after 13.8 percent) continued to provide a boost.

Regionally, the picture was very mixed, partly reflecting differences in the energy crisis support packages offered by the various member states. Hence, a fall in Italy (10.9 percent after 12.3 percent) contrasted with rises in both France (7.0 percent after 6.7 percent) and Spain (5.8 percent after 5.5 percent). Of note, the German data are not yet available (now expected next week) and these could have an important impact on the final Eurozone rate. Elsewhere, Latvia (21.6 percent) remained at the top of the inflation ladder ahead of Estonia (18.8 percent).

The stickiness of the core rates means that today's inflation update will not go down as well at the ECB as first appearances might suggest. The central bank is still very likely to opt for another 50 basis point hike tomorrow. However, the doves may be less keen on a similar-sized move in March. Today's suite of data puts the Eurozone's ECDI at 28 and the ECDI-P at 26, both measures still indicating overall economic outperformance versus expectations.

Consensus for January's HICP flash is 9.1 percent and 5.1 percent for the narrow core. These would compare with 9.2 and 5.2 percent respectively in December.

The flash harmonised index of consumer prices (HICP) provides an early estimate of the final HICP, but using just partial data. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Final data are released a round two weeks later. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Two of these are made available in the flash report amongst which financial markets normally concentrate upon the narrowest which excludes energy, food, alcohol and tobacco.

The measure of choice in the Eurozone is the harmonized index of consumer prices (HICP) which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the Eurozone, where monetary policy decisions rest on the ECB'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 HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.