Consumer price data came in slightly above expected in September, when they increased 0.4 percent on the month after 0.6 percent in August, and 3.7 percent year-over-year, the same as the previous month. Both measures were above consensus forecasts of 0.3 percent and 3.6 percent, respectively, in an Econoday survey. The highest forecasts were 0.4 percent and 3.8 percent. The core index, excluding food and energy, rose 0.3 percent on the month, as it did in August, and came down to 4.1 percent year-over-year from 4.3 percent. Core CPI measures were in line with expectations.

Today's data reflect how challenging it remains for the Fed to bring down inflation, with a headline rate failing to slow and a core rate still more than twice as high as the 2 percent target despite September's improvement.

Energy was up 1.5 percent on the month and down 0.5 percent year-over-year, and food increased at a steady pace of 0.2 percent for a 12-month advance of 3.7 percent.

Services inflation was 0.6 percent on the month and 5.2 percent year-over-year, with services less rent of shelter up 0.6 percent and 2.8 percent, respectively.

Shelter, up 0.6 percent, was the largest contributor to the core monthly CPI gain, accounting for more than half of the increase, with rent, owners' equivalent rent and lodging away from home all boosting core prices. CPI excluding shelter rose 0.3 percent, down from 0.8 percent in August. Motor vehicle insurance, recreation, personal care, new vehicles, and household furnishings and operations also contributed to higher prices on the month.

Today's report comes on the back of higher-than-expected producer prices, with Econoday's Relative Performance Index, at 22, consistent with building tightening risk.

Core prices in September are expected to hold steady at a monthly increase of 0.3 percent to match August's 0.3 percent increase which was 1 tenth over Econoday's consensus. Overall prices are also expected to rise 0.3 percent on the month after August's as-expected percent 0.6 increase which hit expectations. Annual rates, at 3.7 percent overall and 4.3 percent for the core in August, are expected at 3.6 and 4.1 percent respectively.

The CPI is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. Monthly changes in the CPI represent the rate of inflation for the consumer. Annual inflation is also closely watched.

The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-W). All urban consumers are a more inclusive group. The CPI-U is the more widely quoted of the two, although cost-of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.

The CPI is also available by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for many metropolitan areas. The regional and city CPIs are often used in local contracts.

The Bureau of Labor Statistics also produces a chain-weighted index called the Chained CPI. This measures a variable basket of goods and services whereas the regular CPI-U and CPI-W measure a fixed basket of goods and services. The Chained CPI is similar to the personal consumption expenditure price index that is closely monitored by the Federal Reserve Board.

The consumer price index is the most widely followed monthly indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact.

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.

If someone borrows $100 dollars from you today and promises to repay it in one year with interest, how much interest should you charge? The answer depends largely on inflation as you know the $100 will not be able to buy the same amount of goods and services a year from now. The CPI tells us that prices rose 4.2 percent in the U.S. over 2007. To recoup your purchasing power, you would have to charge 4.2 percent interest. You might want to add one or two percentage points to cover default and other risks, but inflation remains the key factor behind the interest rate you charge.

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.