Inflation unexpectedly decelerated again in August. A 0.3 percent monthly rise in prices was well short of the market consensus and small enough to trim the annual inflation rate from 6.8 percent to 6.7 percent, some 4.4 percentage points below last October's 11.1 percent peak albeit still fully 4.7 percentage points above the BoE's medium-term target. The yearly rate now stands at its lowest level since February 2022.

Moreover, core prices were even better behaved, posting a minimal 0.1 percent monthly gain that cut the annual underlying rate from 6.9 percent to 6.2 percent. This matched its weakest print since January.

The main downward contribution to the change in the annual headline rate came from food and non-alcoholic drink where prices rose just 0.4 percent on the month versus a 1.5 percent spike in in the same period in 2022. Restaurants and hotels (minus 0.2 percent after 1.0 percent) also weighed as did furniture and household goods (0.2 percent after 1.3 percent). The main boost came from higher fuel charges which saw transport prices rise 0.2 percent after a 1.3 percent fall a year ago. In fact, overall goods inflation actually accelerated, from 6.1 percent to 6.3 percent. However, the BoE will pay more attention to a marked slowdown in services where the rate fell from 7.4 percent to 6.8 percent, a 5-month trough.

Indeed, today's surprisingly soft update will add to uncertainty about the how the BoE MPC will vote tomorrow. The magnitude of the drop in both headline and core inflation together with the fall in the service sector rate clearly provides ammunition for the doves. More generally, the data put UK's RPI at minus 17. This signals limited overall economic underperformance, but only due to unexpectedly weak prices. The RPI-P stands at 10, showing that the real economy is running just a little hotter than forecast.

At an as-expected 6.8 percent annual rate in July, consumer prices fell from 7.9 percent in June. August's expectations are for a move higher to 7.1 percent with the monthly rate increasing to 0.7 percent following July's 0.4 percent fall.

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.