Eurozone inflation decelerated sharply in May. At 6.1 percent, the final annual rate was in line with the flash estimate and so down nearly a full percentage point versus April's final 7.0 percent. This was its lowest level since February 2022 but still some 4.1 percentage points above the ECB target.

More importantly, the slide in the headline rate was at least partially mirrored in the core rates. Hence, the narrowest measure fell 0.3 percentage points from April's final 5.6 percent to an unrevised 5.3 percent, matching its lowest mark so far in 2023. Excluding just energy and unprocessed food, the rate dropped from 7.3 percent to 6.9 percent. Elsewhere, inflation in non-energy industrial goods decreased from 6.2 percent to 5.8 percent and in services from 5.2 percent to 5.0 percent. Energy (minus 1.8 percent after 2.3 percent) and food, alcohol and tobacco (12.5 percent after 13.5 percent) also had a negative impact.

As yesterday's ECB statement and press conference made clear, the central bank is very unhappy with current levels of underlying inflation and would seem poised to raise key interest rates yet again in July. However, should the core rates continue to decelerate in June, at lease a pause in the tightening cycle thereafter might be on the cards. Today's update leaves the Eurozone ECDI (minus 36) and ECDI-P (minus 25) in negative surprise territory, warning that economic activity may now be responding more quickly than expected to earlier rate hikes.

No revision is expected leaving a 6.1 percent annual headline rate, down from April's final 7.0 percent, and a 5.3 percent narrow core, down from 5.6 percent.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. 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. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices 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 European Monetary Union, 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.