Headline inflation was surprisingly strong last month. A provisional 8.5 percent annual rate was a tick short of January's final mark but fully 0.3 percentage points firmer than the market consensus. The decline, which reflected a 0.8 percent monthly increase in prices, means that the yearly rate is now at its lowest level since last May but still some 6.5 percentage points above the ECB's 2 percent target.

In fact, once again the deceleration in the overall rate was not mirrored in the key core measures. Rather, the narrowest gauge accelerated from 5.3 percent to 5.6 percent while the broader index which, excludes just energy and unprocessed food, rose from 7.1 percent to 7.4 percent. Both readings were well above market expectations and new all-time highs. More generally, the rate for non-energy industrial goods edged up from 6.7 percent to 6.8 percent while its services counterpart climbed from 4.4 percent to 4.8 percent. With food, alcohol and tobacco (15.0 percent after 14.1 percent) also providing yet another boost, the headline dip was wholly attributable to weaker energy (13.7 percent after 18.9 percent).

Regionally, the picture was again mixed. Amongst the larger four member states, a fall in Italy (9.9 percent after 10.7 percent) contrasted with rises in France (7.2 percent after 7.0 percent), Germany (9.3 percent after 9.2 percent) and Spain (6.1 percent after 5.9 percent). Elsewhere, Latvia (20.1 percent) remained at the top of the inflation ladder ahead of Estonia (17.8 percent).

The latest acceleration in the core rates will go down like a lead balloon at the ECB and must bolster the likelihood of another 50 basis point hike in key interest rates in May after a seemingly guaranteed 50 basis point increase this month. Today's data put the Eurozone's ECDI at 8, indicating very mild overall economic outperformance, but the ECDI-P at minus 13, signalling that the real economy is falling slightly short of market expectations.

Consensus for February's HICP flash is 8.2 percent and 5.3 percent for the narrow core. These would compare with 8.6 and 5.3 percent in January.

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.