Prices were firmer than expected in July. A provisional 0.1 percent increase limited the fall in the annual inflation rate to 6.0 percent, some 0.4 percentage points below June's final 6.4 percent but 0.3 percentage points stronger than the market consensus.

The flash HICP registered a 1.5 percent monthly drop (mainly due to summer sales not included in the CPI) that lowered its yearly rate from June's final 6.7 percent to 6.4 percent, now 4.4 percentage points above the ECB's target.

July's deceleration in the annual CPI rate was largely attributable to transport services (2.4 percent after 4.7 percent), non-regulated energy (7.0 percent after 8.4 percent) and processed food (10.9 percent after 11.5 percent). The main boost came from unprocessed food (10.4 percent after 9.4 percent) and housing services (3.6 percent after 3.5 percent). Consequently, core inflation fell again, from 5.6 percent to 5.2 percent.

Underlying inflation remains far too high but at least seems to be moving in the right direction. In part, this may well reflect the contraction in the real economy last quarter. Today's report puts the Italian ECDI at 16 and the ECDI-P at 3. Overall, economic activity is just about running ahead of market expectations.

The annual headline rate is expected to fall from June's final 6.4 percent to 5.7 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.