Eurozone inflation fell sharply in September. At 4.3 percent, the final annual rate was unchanged from its flash estimate and so still well down from August's final 5.2 percent. This was its lowest reading since October 2021 and reduced the overshoot versus the medium-term target to 2.3 percentage points. However, in large part the decline reflected strongly negative base effects prices rose 0.3 percent on the month versus a particularly strong 1.2 percent increase in September 2022.

The core rates were also unrevised, confirming a marked deceleration in underlying prices. The narrowest measure was down 0.8 percentage points at 4.5 percent, its lowest print since August 2022. Excluding just energy and unprocessed food the rate declined 0.7 percentage points to 5.5 percent. Elsewhere, inflation in non-energy industrial goods decreased from 4.7 percent to a marginally lower revised 4.1 percent and in services from 5.5 percent to 4.7 percent, the latter's second successive drop. Energy (minus 4.6 percent after minus 3.3 percent) and food, alcohol and tobacco (8.8 percent after 9.7 percent) also had a negative impact.

Today's update reflects a number of distortions that cloud the underlying picture. In particular, the removal of some transport price caps in Germany led to a jump in prices that helped to slash the national inflation rate from 6.4 percent to 4.3 percent. Even so, with prices posting outright monthly declines in a number of countries, the signs are that Eurozone inflation is beginning to behave itself.

Today's update should leave the ECB on course to keep key interest rates on hold next week. In terms of economic activity, the final September report puts the Eurozone RPI at minus 1 and the RPI-P at minus 7. Both readings indicate that the economy in general is performing much as expected.

No revisions are expected, leaving a 4.3 percent headline inflation rate, down from August's final 5.2 percent, and a 4.5 percent narrow core rate, down from 5.3 percent.

The harmonised index of consumer prices (HICP) is a measure of consumer prices used to calculate inflation on a consistent basis across the European Union. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Eurostat provides statistics for the EU and Eurozone aggregates, individual member states and for the major subsectors. Over the short-term, the central bank focusses on a number of core measures which seek to strip out the most volatile components and so give a much better guide to underlying developments. Amongst these, financial markets normally concentrate upon the narrowest gauge which excludes energy, food, alcohol and tobacco.

The measure of choice in the European Monetary Union (EMU) is the harmonized index of consumer prices which has been constructed to allow cross member state comparisons. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In the European Monetary Union, where monetary policy decisions rest on the ECB'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 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.

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 HICP are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.