Eurozone inflation fell sharply again in November and, in line with October, by more than expected. At 2.4 percent, the flash annual rate was well down from the previous period's 2.9 percent and some 0.4 percentage points below the market consensus. This was its weakest reading since July 2021 and reduced the overshoot versus the medium-term target to just 0.4 percentage points.

Crucially too, there was further good news on the core rates. The narrowest measure was down a hefty 0.6 percentage points at a 3.6 percent annual rate, also easily undershooting market expectations and its lowest print since April 2022. Excluding just energy and unprocessed food, the rate declined an even sharper 0.8 percentage points to 4.2 percent. Elsewhere, inflation in non-energy industrial goods decreased from 3.5 percent to 2.9 percent while services dropped from 4.6 percent to 4.0 percent, the latter's fourth successive fall. Energy (minus 11.5 percent after minus 11.2 percent) and food, alcohol and tobacco (6.9 percent after 7.4 percent) also had a small negative impact.

Regionally, inflation was down in most member states and only rose in the Netherlands (1.4 percent after minus 1.0 percent). Five countries now have rates beneath the 2.0 percent target.

Today's update should go down very well at the ECB and probably means another unanimous vote for no change in key interest rates at the December meeting. Looking ahead, base effects mean that headline inflation is very likely to rise next month but the core rate could still ease further. In any event, today's update significantly boosts the chances that official interest rates have peaked. Today's reports trim the Eurozone RPI to minus 11 but only due to weak prices at 5 the RPI-P shows overall real economic activity essentially matching market expectations.

Consensus for November's HICP flash is 2.8 percent and 3.9 percent for the narrow core. These would compare respectively with October's 2.9 and 4.2 percent, the former down sharply from September's 4.3 percent and the latter down from 4.5 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.