Inflation slowed sharply in February. A final 0.2 percent monthly rise in prices was a tick less than the provisional estimate and slashed the annual inflation rate from January's final 10.0 percent to 9.1 percent, its third consecutive decline.

The HICP largely followed suit, its 0.2 percent monthly gain also trimmed 0.1 percentage point to a final 0.1 percent. This reduced its yearly rate from January's final 10.7 percent to 9.8 percent, now some 7.8 percentage points above the ECB's target.

As shown in the earlier report, the monthly drop in the annual CPI inflation rate was largely attributable to sharply weaker energy prices. Regulated energy (minus 16.4 percent after minus 12.0 percent) and non-regulated energy (40.8 percent after 59.3 percent) both had a sizeable negative impact. However, there were gains in unprocessed food (8.7 percent after 8.0 percent), processed food (15.5 percent after 14.9 percent) and recreational services (6.1 percent after 5.5 percent). Consequently, core inflation was revised down from 6.4 percent to 6.3 percent but this remained well above January's 6.0 percent print.

Accordingly, the slide in the headline rate simply masks a still firmly rising trend in underlying inflation. The February data put the Italian ECDI at minus 22 and the ECDI-P at minus 1, the latter dipping just below zero for the first time since last October.

No changes are expected in the final data leaving a 9.2 percent annual inflation rate, down from January's final 10.0 percent.

The consumer price index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation. A provisional estimate, with limited detail, is released about two weeks before the final data are reported.

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 Italy 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. As a member of the European Monetary Union, Italy's interest rates are set by the European Central Bank.

Italy like other EMU countries has both a national CPI and a harmonized index of consumer prices (HICP). Components and weights within the national CPI vary from other countries, reflecting national idiosyncrasies. The core CPI, which excludes fresh food, is usually the preferred indicator of short-term inflation pressures.

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. 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.