Prices were again firmer than expected in August. A provisional 0.4 percent monthly increase put annual inflation at 5.5 percent, down from July's final 5.9 percent but 0.2 percentage points above the market consensus.

The flash HICP registered a 0.2 percent monthly gain which, with base effects very negative, was small enough cut its yearly rate from 6.3 percent to 5.5 percent, now 3.5 percentage points above the ECB's target.

August's deceleration in the annual CPI rate was largely attributable to non-regulated energy (5.7 percent after 7.0 percent), recreation (5.9 percent after 6.6 percent), unprocessed food (9.2 percent after 10.4 percent) and transport services (1.2 percent after 2.4 percent). Housing (4.0 percent after 3.6 percent) and regulated energy (minus 29.0 percent after minus 30.3 percent) provided the main boost. Consequently, core inflation fell quite sharply, from 5.2 percent to 4.8 percent.

Since peaking at 6.4 percent in February, underlying inflation has slowed significantly, in line with an economy that is teetering on the brink of recession. Indeed, if it were all down to Italy, it would probably be odds against another ECB tightening next month. Today's report puts the Italian ECDI at 14 and the ECDI-P at 16. Overall, economic activity is running slightly ahead of market expectations but the real economy is lagging.

Annual inflation is seen falling from July's final 5.9 percent to 5.3 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.