Consumer prices moved much as expected in July. A 0.4 percent monthly drop was just a tick steeper than expected and large enough to reduce the headline annual inflation rate from 7.9 percent to 6.8 percent, in line with the market consensus. The yearly rate now stands at its lowest level since February 2022 but still some 4.8 percentage points above the BoE's medium-term target.

However, the main category driving down the headline rate was energy. Consequently, and more importantly, the core inflation rate was only unchanged at June's 6.9 percent, one of the strongest outturns since March 1992.

Inflation in housing, water, electricity, gas and other fuels declined from 12.0 percent in June (and a 26.7 percent peak in January) to 6.8 percent largely because of the lowering of the Office of Gas and Electricity Markets (Ofgem) price cap. Elsewhere, the rate for food and soft drink (14.8 percent after 17.3 percent) also fell markedly alongside clothing and footwear (6.6 percent after 7.2 percent), transport (minus 2.0 percent after minus 1.8 percent) and miscellaneous goods and services (5.8 percent after 6.4 percent). However, inflation accelerated in health (8.9 percent after 8.2 percent), restaurants and hotels (9.6 percent after 9.5 percent) and alcohol and tobacco (9.4 percent after 9.2 percent). Indeed, while the overall goods rate dropped from 8.5 percent to 6.1 percent, inflation in services climbed from 7.2 percent to 7.4 percent, its strongest print since March 1992.

As such, today's report is unlikely to go down too well at the BoE. The bank has highlighted its worries about the persistent strength of service sector prices and the July data will do nothing to allay such fears. More generally, the UK's ECDI now stands at 47 and the ECDI-P at 56. In other words, economic activity in general is running a good deal hotter than expected.

At 7.9 percent in June, annual inflation fell from 8.7 percent in May. July's expectations are another leg down to 6.8 percent, largely due to lower energy prices. The monthly rate is seen at minus 0.5 percent after June's 0.1 percent.

The consumer price index (CPI) is an average measure of the level of the prices of goods and services bought for the purpose of consumption by the vast majority of households in the UK. It is calculated using the same methodology developed by Eurostat, the European Union's statistical agency, for its harmonised index of consumer prices (HICP). The CPI is the Bank of England's target inflation measure.

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 UK, 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. Inflation is an increase in the overall price level 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 CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

For monetary policy, the Bank of England generally follows the annual change in the consumer price index which is calculated using the European Union's Eurostat methodology so that inflation can be compared across EU member states.