Inflation continued to fall, providing a ray of good news as Italy teeters on the edge of recession.

The consumer price index rose by 0.2 percent month-over month in September, according to a flash estimate, bringing annual inflation down to 5.3 percent from 5.4 percent in August.

Core inflation decelerated even more quickly, declining to an annual rate of 4.6 percent, down from 4.8 percent in August. However ,service price inflation which has become a key metric for rate setters at the European Central Bank advanced to an annual rate of 4.1 percent from 3.6 percent in August.

The flash HICP rose by 1.7 in September, with the end of the summer sales (which is not included in the whole nation CPI) providing a distortion to the month-over-month result. Annual harmonised inflation rose to 5.7 percent from 5.5 percent in August.

Slowing food price inflation accounted for much of the decline in the non-harmonised series. Prices of unprocessed food rose by an annual rate of 7.7 percent, down from the 9.2 percent pace in August, while processed food inflation declined to 9.1 percent from 10.0 percent previously.

The deceleration of core inflation could further sour relations between Italy and the ECB; top government officials have been highly critical of the bank's aggressive tightening measures.

The latest data take the RPI to minus 14 from 1 previously, while the RPI-P steadied at minus 13.

Prices are expected to rise 0.2 percent on the month following a 0.3 percent gain in August.

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.