Prices rose more quickly than expected in May but the annual inflation rate still fell sharply. A 0.3 percent monthly increase in the CPI was well above the market consensus but, with base effects quite strongly negative, small enough to reduce the annual inflation rate from April's final 8.2 percent to 7.6 percent.

The flash HICP similarly saw a 0.3 percent monthly gain, trimming its yearly rate from 8.7 percent to 8.1 percent, now 6.1 percentage points above the ECB's target.

However, May's deceleration in the annual CPI rate was largely attributable to non-regulated energy where inflation fell from 26.6 percent to 20.5 percent. Other negative effects came from processed food (13.4 percent after 14.0 percent), transport services (5.5 percent after 6.0 percent) and non-energy industrial goods (5.1 percent after 5.3 percent). The main upward pressure came from unprocessed food (8.9 percent after 8.4 percent) and housing services (3.4 percent after 3.2 percent). Consequently, core inflation dipped just a tick to 6.1 percent.

Accordingly, underlying inflation remains decidedly sticky and, for the ECB, this will negate much of the good news contained in the fall in the headline rate. More generally, today's update puts the Italian ECDI at 12 but only due to strong prices. At minus 16, the ECDI-P shows that real economic activity is falling slightly behind market expectations.

Prices are seen down 0.1 percent on the month.

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.