Eurozone inflation continued to fall sharply in October and by much more than expected. At 2.9 percent, the flash annual rate was down from September's final 4.3 percent and fully 0.5 percentage points below the market consensus. This was its lowest reading since July 2021 and trimmed the overshoot versus the medium-term target to less than 1 percentage point. In large part the decline reflected strongly negative base effects prices rose 0.1 percent on the month versus a very strong 1.5 percent increase in September 2022.

Even so, there was good news on the core rates too. The narrowest measure was down 0.3 percentage points at a 4.2 percent annual rate, matching expectations but its lowest print since July 2022. Excluding just energy and unprocessed food the rate declined a sharper 0.5 percentage points to 5.0 percent. Elsewhere, inflation in non-energy industrial goods decreased from 4.1 percent to 3.5 percent while services dipped from 4.7 percent to 4.6 percent, the latter's third successive drop. Energy (minus 11.1 percent after minus 4.6 percent) and food, alcohol and tobacco (7.5 percent after 8.8 percent) also subtracted again.

Regionally, most member states saw lower inflation rates but there were gains in Spain (3.5 percent after 3.3 percent) Estonia (5.0 percent after 3.9 percent) and Greece (3.9 percent after 2.4 percent). Of note, annual inflation is now negative in both Belgium (minus 1.7 percent) and the Netherlands (minus 1.0 percent) and, alongside Italy, are below the ECB's target.

Today's update should go down well at the ECB and bodes cautiously positively for a downward revision to the bank's inflation forecast in December. This would significantly bolster the chances that official interest rates have peaked. Today's reports trim the Eurozone RPI to minus 15 and the RPI-P to minus 14, both measures showing overall economic activity lagging market expectations.

Consensus for October's HICP flash is 3.4 percent and 4.2 percent for the narrow core. These would compare respectively with September's 4.3 and 4.5 percent, the former down sharply from August's 5.2 percent and the latter down from 5.3 percent.

The flash harmonised index of consumer prices (HICP) provides an early estimate of the final HICP, but using just partial data. Changes in the index provide an estimate of inflation, as targeted by the European Central Bank (ECB). Final data are released a round two weeks later. 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. Two of these are made available in the flash report amongst which financial markets normally concentrate upon the narrowest which excludes energy, food, alcohol and tobacco.

The measure of choice in the Eurozone is the harmonized index of consumer prices (HICP) 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 Eurozone, 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.