Strongly negative base effects ensured that headline inflation provisionally fell very sharply in March. The annual flash rate weighed in at 6.9 percent, down from February's final 8.5 percent and its lowest mark since February 2022. The latest outturn was also 0.4 percentage points short of the market consensus and now 4.9 percentage points above the ECB's target.

However, once again the deceleration in the overall rate was not mirrored in the key core measures. Hence, the narrowest gauge accelerated from 5.6 percent to 5.7 percent which, while in line with expectations, constituted yet another all-time high. Similarly, excluding just energy and unprocessed food, the rate edged up from 7.4 percent to 7.5 percent, also a fresh peak. Elsewhere, the rate for non-energy industrial goods eased from 6.8 percent to 6.6 percent but, more ominously, inflation in services climbed from 4.8 percent to 5.0 percent. Food, alcohol and tobacco also extended their upward trend, the rate here rising from 15.0 percent to 15.4 percent.

Regionally, all member states bar Malta (7.0 percent) saw a significant decline in their respective headline rate. France decreased from 7.3 percent to 6.6 percent, Germany from 9.3 percent to 7.8 percent, Italy from 9.8 percent to 8.2 percent and Spain from 6.0 percent to just 3.1 percent. Latvia (17.3 percent after 20.1 percent) remained at the top of the inflation ladder ahead of Estonia (15.6 percent after 17.8 percent).

The ECB will see through today's headline drop and concentrate much more upon the core rates. Here, developments remain uncomfortably strong and far too high to suggest that the central bank's price stability goals can be reached within an acceptable time frame. As such, today's report is probably consistent with yet another hike in official interest rates in May. The March update puts the Eurozone's ECDI at minus 2 and the ECDI-P at 3, both values indicating that overall economic activity is moving much as expected.

Consensus for March's HICP flash is 7.3 percent and 5.7 percent for the narrow core. These would compare with 8.5 and 5.6 percent in February.

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.