Monthly CPI data show that headline inflation slowed to 7.4 percent in January from 8.4 percent in December, below the consensus forecast of 8.0 percent but still well above the Reserve Bank of Australia's target range of 2.0 percent to 3.0 percent. This monthly indicator measures the year-over-year change in the CPI index compared with the same month twelve months earlier.

Today's monthly data also show a moderation in underlying price pressures in January, with the measure excluding volatile items falling to 7.2 percent from 8.1 percent in December. Most categories recorded lower year-over-year growth in prices in January, including food, transport, and communications, with health costs being the main exception.

RBA officials forecast headline inflation to have peaked around the end of 2022 and expect it will moderate over 2023. Today's data are consistent with this assessment but officials will likely remain concerned by ongoing strength in price pressures at the start of the year ahead of their next policy meeting next week.

Consensus for consumer prices in January are expected to ease to 8.0 year-over-year percent versus 8.4 percent in December.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by households for a fixed basket of goods and services. In Australia, the CPI measures the changes in the price of a fixed basket of goods and services, acquired by household consumers who are residents in the eight State/Territory capital cities. (Darwin, Perth, Sydney, Melbourne, Hobart, Brisbane, Canberra and Adelaide).

Data are released quarterly and, since 2022, monthly. Quarterly inflation data measure the year-over-year change in the index relative to the same quarter twelve months previously. Monthly inflation data measure the year-over-year change in the index relative to the same month twelve months previously.

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 Australia, 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 Reserve Bank of Australia generally follows the annual change in the consumer price index. It has an inflation target of 2 percent to 3 percent. The RBA also has two preferred core or analytical measures - the weighted and trimmed means. The trimmed mean is a method of averaging that removes a small percentage of the largest and smallest values before calculating the mean. After removing the specified observations, the trimmed mean is found using an arithmetic averaging formula. The weighted mean excludes certain items from the CPI basket (the exclusion approach). Typically, the excluded items are those that are volatile and/or display pronounced seasonal patterns, and those that are subject to administrative price setting.